Banking Performance Analysis in Bangladesh

This assignment tasks you with analyzing the performance of banks in Bangladesh. You will utilize annual reports from various Bangladeshi banks, including BRAC Bank, Dhaka Bank, Dutch Bangla Bank, Eastern Bank, EXIM Bank, Mercantile Bank, Prime Bank, Southeast Bank, The City Bank, and Trust Bank. Additionally, you'll draw upon relevant research papers and publications to provide a comprehensive understanding of the banking sector in Bangladesh.

Committed to Ensure the International Quality Education
The term paper on:
“The banking system of Bangladesh-Prospects &Challenges”
PREPARED FOR
Mr. Sheikh Mozaffar Hossain
Professor
Department of Business Administration
IBAIS University
PREPARED BY
Md. Saiduzzaman Selim
Masters of Business Administration
IBAIS University
7 January, 2015

The banking system of Bangladesh-Prospects &Challenges
Letter of Transmittal
7th Jan 2015
Mr. Sheikh Mozaffar Hossain
Professor
IBAIS Business School
Dhanmondi-27, Dhaka
Dear Sir,
It is with great respect that we sate that; I am very delighted to submit the research paper on “The
banking system of Bangladesh-Prospects &Challenges”. This interesting, challenging and analytical
research study provides understanding of banking system in details and challenges on going in the
culture of the industry .The research paper has been prepared with great efforts and dedication;
incompliance with course requirements and your instructions within the deadline for submissions is Jan
7th 2015. I have tried my level best to complete the paper with respect to the desired requirements. I
have found comprehensive learning experience for writing and preparing this report. I therefore,
strongly hope that you will accept this onerous task with satisfaction.
Yours sincerely
Md. Sumon

The banking system of Bangladesh-Prospects &Challenges
Acknowledgements
In the beginning, we are grateful to the almighty Creator to help us completing this term-Paper
on time. The term paper has been written by me. I am profoundly acknowledged to my
classmates, friends and to reviewer. Especially I would like to thank my friend Saiduzzaman
Selim for reviewing, comments and providing useful help during the initial phase of this paper. I
am grateful to the researchers who has helped me to collect information from their own
research’s studies on that particular fields. I would like to thank the all participant scholars to
this study. In addition, for completing the research paper, credits should go to my honorable
course teacher to Mr. Sheikh Mozaffar Hossain for-delivering-beneficial-lectures-and-
instruction-in-the-class.
To end this, let us express gratefulness to all of contributors again for their generosity and wish to this
process.
The Name of Acknowledged Research Scholar:
Md. Sumon

The banking system of Bangladesh-Prospects &Challenges
Introduction:
Banking system plays very important role in the economic life of the nation. The health of the
economy is closely related to the soundness of its banking system. Although banks create
no new wealth but their borrowing, lending and related activities facilitate the process of
production, distribution, exchange and consumption of wealth. In this way they become very
effective partners in the process of economic development. Today modern banks are very
useful for the utilization of the resources of the country. The banks are mobilizing the savings
of the people for the investment purposes. If there would be no banks then a great portion of a
capital of the country would remain idle. A bank as a matter of fact is just like a heart in the
economic structure and the Capital provided by it is like blood in it. As long as blood is in
circulation the organs will remain sound and healthy. If the blood is not supplied to any organ
then that part would become useless, so if the finance is not provided to Agricultural sector or
industrial sector, it will be destroyed. Loan facility provided by banks works as an incentive to
the producer to increase the production. Many difficulties in the international payments have
been overcome and volume of transactions has been increased. Cheques, drafts bills of
exchange and letters of credit are very important instruments of the banks. The banks collect
these instruments drawn on banks in other cities or countries and proceeds according to the
accounts of the customer's concerns.
A little history of banking system:
A bank is a financial institution licensed by a government. Its primary activities include
providing financial services to customers while enriching its investors. Many financial
activities were allowed over time. The level of government regulation of the banking industry
varies widely, with countries such as Iceland, having relatively light regulation of the banking
sector, and countries such as China having a wide variety regulations but no systematic process
that can be followed typical of a communist system. The name bank derives from the Italian
word banco “desk/bench”, used during the Renaissance by Jewish Florentine bankers, who
used to make their transactions above a desk covered by a green tablecloth. However, there are
traces of banking activity even in ancient times. In fact, the word traces its origins back to the
Ancient Roman Empire, where moneylenders would set up their stalls in the middle of
enclosed courtyards called macella on a long bench called a bancu, from which the words
banco and bank are derived. As a moneychanger, the merchant at the bancu did not so much

The banking system of Bangladesh-Prospects &Challenges
invest money as merely convert the foreign currency into the only legal tender in Rome—that
of the Imperial Mint.
The earliest evidence of money-changing activity is depicted on a silver drachm coin from
ancient Hellenic colony Trapezus on the Black Sea, modern Trabzon, and c. 350–325 BC,
presented in the British Museum in London. The coin shows a banker’s table (trapeza) laden
with coins, a pun on the name of the city.
Definition of Bank:
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 Afghan traders popularly known as Kabuliwallas. Muslim
businessmen from Kabul, Afghanistan came to India and started money lending business in
exchange of interest sometime in 1312 A.D. They were known as ‘Kabuliwallas’.
Bank is a financial institution and intermediary, which collect deposits through its different
deposit mechanism and provide loans and advances among the loan Clients/ investors with the
view to earn profit. Thus a bank is a financial intermediary and a dealer of loans and debts. In
financial concept, banking means safe custody of money and at the same time an institution for
money transaction. To regulate the banking business some financial laws of the government are
followed, the old ones are the British Stamp Law, 1881 and English Exchange Bill, 1882. Other
laws include the English Financial Act of 1915 and Indian Company Act of 1931 and the
Indian Banking Regulation Act of 1949.
The concept of Banking is an old civilization. Banking activities in its earliest crude form of
lending and exchange prevailed during the ancient period. The legend of huge treasure of the
Great King Solomon, the man of great wisdom, son of David (Alaihee-aas-Salam) and the
activities of taxation and banking during his reign in 1005 B.C.
The business of banking is in many English common law countries not defined by statute but
by common law, the definition above. In other English common law jurisdictions there are

The banking system of Bangladesh-Prospects &Challenges
statutory definitions of the business of banking or banking business. When looking at these
definitions it is important to keep in minds that they are defining the business of banking for the
purposes of the legislation, and not necessarily in general. In particular, most of the definitions
are from legislation that has the purposes of entry regulating and supervising banks rather than
regulating the actual business of banking. However, in many cases the statutory definition
closely mirrors the common law one.
Examples of statutory definitions:
 “Banking business” means the business of receiving money on current or deposit
account, paying and collecting cheques drawn by or paid in by customers, the making
of advances to customers, and includes such other business as the Authority may
prescribe for the purposes of this Act; (Banking Act (Singapore), Section 2,
Interpretation).
 “Banking business” means the business of either or both of the following:
 Receiving from the general public money on current, deposit, savings or other similar
account repayable on demand or within less than [3 months] … or with a period of
call or notice of less than that period.
 Paying or collecting cheques drawn by or paid in by customers. The Indus Valley
Civilization, the Roman Civilization, the Greek Civilization, the Egyptian Civilization,
the Mesopotamian Civilization, the Babylonian Civilization, the Vedic Indian
Civilization, the Muslim Civilization played important roles in giving birth to and
flourishing of Bank.
Whoever, being an individual firm, company or corporation generally deals in the business of
money and credit is called bank. In our country, any institution, which accepts, for the purpose
of lending or investment deposits of money from public, repayable on demand or otherwise,
and with transferable by checks draft order and otherwise can be termed as a bank.
The purpose of banking is to ensure transfer of money from surplus unit to deficit units. Bank
is all countries work as the repository of money. The owners look for safety and amount of
interest for their deposits with Banks. Entrepreneurs try to obtain money from the banks as
working capital and for long-term investment. These entrepreneurs welcome effective and
forward-looking advice for investment. Banking sector thus owe a great to the deposit holders
on the hand and the entrepreneurs on the other. They are expected to play the role of friend,

The banking system of Bangladesh-Prospects &Challenges
philosopher, and guide for the deposit holders and the entrepreneurs. Since liberation,
Bangladesh passed through fragile phases of development in the banking sector.
The nationalization of banks in the post liberation period was intended to safe the institutions
and the interest of the depositors. Those handling the banking sector have borne the burden of
putting banks on reliable footings. Despite all that was done, some elements of irregularities
appeared. With the assertion of the role of the Central bank, The Bangladesh bank started
adopting measures for putting banking institutions on right track. Yet the performance of public
sector management of banks left some negative effects in the money market in particular and
the economy in general. The agility among the borrowers manipulates the banking sector as a
whole. In effect, a default culture appeared on the scene.
The opening of PRIVATE and FOREIGN participants to the banking sector was intended to
obtain desirable results from banking. The authorization of private banks was designed to
create competition among the banks and competition in the form of efficiency with and the
productivity in enterprises funded by banks. Unfortunately, for the people, at large banking
sector is yet to obtain the credit for efficiency, credibility, and growth.
The clever, among the user of banking services, have influenced the management of banks, for
obtaining short-term and long-term loans. They sometimes showed inflated to get money for
investment in business and industry. Few diverted their loan money to purposes different from
the loan proposals, and invested in non-profitable units have failed to repay their loans to the
banks. For this reason new entrepreneurs are not getting capital while defaulting entrepreneurs
have started obtaining either relief in the form of rescheduling of the repayment program or
additional inevitable money for diversified units.
Part: 1: The banking System of 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

The banking system of Bangladesh-Prospects &Challenges
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 sects oral 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.

The banking system of Bangladesh-Prospects &Challenges
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 Tk 2,000
(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

The banking system of Bangladesh-Prospects &Challenges
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.The Banking Industry is Bangladesh is one
characterized by strict regulations and monitoring from the central governing body, the
Bangladesh Bank. The chief concern is that currently there are far too many banks for the
market to sustain. As a result, the market will only accommodate only those banks that can
transpire as the most competitive and profitable ones in the future.
Currently, the major financial institutions under the banking system include:
1. Bangladesh Bank
2. Commercial Banks including Islamic Banks
3. Leasing Companies
4. Finance Companies
Scheduled Banks in Bangladesh:
After the independence, banking industry in Bangladesh started its journey with 6 nationalized
commercialized banks, 2 State owned specialized banks and 3 Foreign Banks. In the 1980's
banking industry achieved significant expansion with the entrance of private banks. Now, banks
in Bangladesh are primarily of two types:
 Scheduled Banks: The banks which get license to operate under Bank Company Act,
1991 (Amended in 2003) are termed as Scheduled Banks.
 Non-Scheduled Banks: The banks which are established for special and definite objective
and operate under the acts that are enacted for meeting up those objectives, are termed as
Non-Scheduled Banks. These banks cannot perform all functions of scheduled banks.
There are 56 scheduled banks in Bangladesh who operate under full control and supervision of
Bangladesh Bank which is empowered to do so through Bangladesh Bank Order, 1972 and Bank
Company Act, 1991. Scheduled Banks are classified into following types:
 State Owned Commercial Banks (SOCBs): There are 4 SOCBs which are fully or
majorly owned by the Government of Bangladesh.

The banking system of Bangladesh-Prospects &Challenges
 Specialized Banks (SDBs): 4 specialized banks are now operating which were established
for specific objectives like agricultural or industrial development. These banks are also
fully or majorly owned by the Government of Bangladesh.
 Private Commercial Banks (PCBs): There are 39 private commercial banks which are
majorly owned by the private entities. PCBs can be categorized into two groups:
 Conventional PCBs: 31 conventional PCBs are now operating in the industry. They
perform the banking functions in conventional fashion i.e interest based operations.
 Islami Shariah based PCBs: There are 8 Islami Shariah based PCBs in Bangladesh and
they execute banking activities according to Islami Shariah based principles i.e. Profit-
Loss Sharing (PLS) mode.
 Foreign Commercial Banks (FCBs): 9 FCBs are operating in Bangladesh as the branches
of the banks which are incorporated in abroad.
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 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.
The number of banks in all now stands at 53 in Bangladesh. Out of the 53 banks, 4 are
Nationalized Commercial Banks (NCBs), 28 local private commercial banks, 12 foreign banks,
5 are Development Financial Institutions (DFIs) and the rest of 4 are other bank 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.
Services (Accounts, FDR, PDS, Deposit Scheme) Current Account:

The banking system of Bangladesh-Prospects &Challenges
Generally this sort of account opens for business purpose. Customers can withdraw money
once or more against their deposit. No interest can be paid to the customers in this account. If
the amount of deposit is below taka 1,000 on an average the bank has authority to cut taka 50
from each account as incidental charge after every six months. Against this account loan
facility can be ensured. Usually one can open this account with taka 500. One can open this sort
of account through cash or check/bill. All the banks follow almost the same rules for opening
current account.
Savings Bank Account:
Usually customers open this sort of account at a low interest for only security. This is also an
initiative to create people’s savings tendency. Generally, this account is to be opened at taka
100. Interest is to be paid in June and December after every six months. If money is withdrawn
twice a week or more than taka 10,000 is withdrawn (if 25% more compared to total deposit)
then interest is not paid. This account guarantees loan. Almost all the banks follow the same
rules in the field of savings account, except foreign banks for varying deposit. On an average,
all the banks give around six percent interest.
Special Services of Bank:
Some Banks render special services to the customers attracting other banks.
Internet Banking:
Customers need an Internet access service. As an Internet Banking customer, he will be given a
specific user ID and a confident password. The customer can then view his account balances
online. It is the industry-standard method used to protect communications over the Internet. To
ensure that customers’ personal data cannot be accessed by anyone but them, all reporting
information has been secured using Version and Secure Sockets Layer (SSL).
Home Banking:
Home banking frees customers of visiting branches and most transactions will be automated to
enable them to check their account activities transfer fund and to open L/C sitting in their own
desk with the help of a PC and a telephone.
Electronic Banking Services for Windows (EBSW):

The banking system of Bangladesh-Prospects &Challenges
Electronic Banking Service for Windows (EBSW) provides a full range of reporting
capabilities, and a comprehensive range of transaction initiation options. The customers will be
able to process all payments as well as initiate L/Cs and amendments, through EBSW. They
will be able to view the balances of all accounts, whether with Standard Chartered or with any
other banks using SWIFT. Additionally, transactions may be approved by remote authorization
even if the approver is out of station.
Automated Teller Machine (ATM):
Automated Teller Machine (ATM), a new concept in modern banking, has already been
introduced to facilitate subscribers 24 hour cash access through a plastic card. The network of
ATM installations will be adequately extended to enable customers to non-branch banking
beyond banking.
Tele Banking:
Tele Banking allows customers to get access into their respective banking information 24 hours
a day. Subscribers can update themselves by making a phone call. They can transfer any
amount of deposit to other accounts irrespective of location either from home or office.
SWIFT:
Swift is a bank owned non-profit co-operative based in Belgium servicing the financial
community worldwide. It ensures secure messaging having a global reach of 6,495 Banks and
Financial Institutions in 178 countries, 24 hours a day. SWIFT global network carries an
average 4 million message daily and estimated average value of payment messages is USD 2
trillion. Swift is a highly secured messaging network enables Banks to send and receive Fund
Transfer, L/C related and other free format messages to and from any banks active in the
network. Having SWIFT facility, Bank will be able to serve its customers more profitable by
providing L/C, Payment and other messages efficiently and with utmost security. Especially it
will be of great help for our clients dealing with Imports, Exports and Remittances etc.
Monetary & Credit Policy:
The monetary and credit policy for the financial year that ended in June, 2000 was formulated
with the objective of full utilization of domestic resources and rapid economic growth through
priorities for agriculture, industry, export, and expansion and strengthening of the private
sector, at the same time keeping inflation within tolerable limits. A modern expansionary

The banking system of Bangladesh-Prospects &Challenges
monetary and credit policy was adopted in order to make good the losses to agriculture,
industry, and infrastructure by the devastating floods of 1998. After the flood the economy
remained sluggish in the first quarter of 1999-2000 and the private sector demand for credit
shrank. In view of this, the Annual Development Program (ADP) was expanded and
development activities in the private sector were geared up. As a result, the public sector
absorbed credit at an accelerated rate. Though credit to the private sector picked up towards the
end of the year, the overall annual growth was smaller than programmed, although gross
domestic credit expanded a little faster than projected. Money supply increased by 15.3% in
1999-2000 compared to the expansion of 8.6% in the preceding year.
Narrow Money:
Narrow Money increased by Tk. 2,631.90 crores or 15.3% to Tk.19881.30 crores in 1999-2000.
Of the components of Narrow Money, currency outside banks went up by Tk.1489.40 crores or
17.2% to Tk.10176.00 crores, and demand deposits went up by Tk.1142.50 crores or 13.3% to
Tk.9705.30 crores.
Broad Money:
Broad Money increased by Tk.11735.70 crores or 18.6% to Tk. 74,762.40 crores in 1999-2000
compared to the increase of 12.8% in the preceding year. Of the components of Broad Money,
Narrow Money increased by 15.3% and time deposits rose by 19.9% compared to the increase
of 8.6% in Narrow Money and 14.5% in time deposits in the preceding year. The shares of
currency outside banks, demand deposits and time deposits in Broad Money stood at 13.6%,
13.0%, and 73.4% respectively on 30th June, 2000 compared to 13.8%, 13.6% and 72.6%
respectively on 30th June, 1999. Expansion of credit to the private sector, government sector
(net), public sector, and other assets (net), along with a surplus in net foreign assets contributed
to the expansion of Broad Money.
Reserve Money:
Reserve Money increased by Tk.2321.80 crores or 15.7% to Tk.17064.50 crores in 1999-2000
compared to the increase of 8.3% during the preceding year. Of the components of Reserve
Money, currency outside banks increased by Tk.1489.40 crores or 17.1% compared to the
increase of Tk.533.30 crores or 6.5% during the preceding year. Scheduled banks balances with
the Bangladesh Bank increased by Tk.770.90 crores or 15.3% in 1999-2000 compared to the
increase of Tk.488.20 crores or 10.8% in the preceding year. Their cash in tills increased by

The banking system of Bangladesh-Prospects &Challenges
Tk.61.50 crores or 6.0% as against the increase of Tk.103.60 crores or 11.2% in the preceding
year. The increase in Bangladesh Bank’s credit to the government (net) by Tk.1,738.10 crores
and net surplus in the foreign sector by Tk.1,262.40 crores played the main role in exerting
expansionary influence on the Reserve Money. However the decline of Tk.333.60 crores and
Tk.44.90 crores in the borrowings by the scheduled banks and other financial institutions
respectively along with the fall of Tk.300.20 crores in other assets (net) partly offset the
expansionary impact of those sectors.
Domestic Credit:
Total domestic credit increased by Tk.8581.20 crores or 13.6% to Tk. 71,489.00 crores
(including adjustment of bonds issued by the government) in 1999- 2000 as compared to the
increase of Tk.7267.60 crores or 13.1% in the preceding year. Expansion of credit to the
government, private, and public sectors to the extent of Tk.3524.30 crores (31.3%), Tk.4906.10
crores (10.7%), and Tk.150.80 crores (2.5%) respectively contributed to the expansion in total
domestic credit in 1999-2000. Credit to the government and private sector had increased by
21.3% and 13.8% respectively, while credit to the public sector declined by 3.7% in the
preceding year.
Bank Credit:
The outstanding level of bank credit (excluding foreign bills and inter-bank items) increased by
Tk.5,123.30 crores or 10.3% to Tk.54,646.10 crores in 1999- 2000 as compared to the increase
of 12.4% in the preceding year. Of the components of bank credit, advances increased by
Tk.4892.70 crores or 10.3% and the bills purchased and discounted went up by Tk.230.60
crores or 11.3%.
Bank Deposits:
Bank deposits (excluding inter-bank items) increased by Tk.11044.70 crores or 18.6% to
Tk.70, 278.70 crores in 1999-2000 compared to the increase of 14.2% in the preceding year. Of
this increase , time deposits went up by Tk.9,103.80 crores or 19.9% to Tk.54,881.10 crores,
government deposits by Tk.723.60 crores or 14.8% to Tk.5,615.20 crores and demand deposits
by Tk. 1,142.50 crores or 13.3% to Tk.9,705.30 crores. On the other hand, restricted deposits
increased by Tk.74.80 crores in 1999-2000.
Cash Reserve Requirements (CRR):

The banking system of Bangladesh-Prospects &Challenges
Statutory CRR with Bangladesh Bank was lowered for the scheduled banks to 4.0% of their
liabilities (demand plus time deposits) (excluding inter-bank deposits) from 5% with effect
from 1st October, 1999.
Bank Rate:
The Bank Rate was lowered from 8.0% to 7.0% on 29th August, 1999 and remained unchanged
through 30th June, 2000.
Part: 2: The Prospects and challenges:
The letters of intent (LoIs) `have already been issued to the sponsors of such approved banks.
There have been many significant developments in the economy of Bangladesh since 2000-
2001, the central bank stated, explaining the economic context and rationale behind issuing
licenses in favor of new banks. The economy has grown and the banking system has become
more competitive but there are still a large number of under-banked people in Bangladesh.
Recent estimates from a survey conducted by the Institute of Microfinance (IoF) found that
only 45 per cent of the nearly 9000 households surveyed do have access to banks and micro-
finance institutions (MFIs) for loans.
The population per branch (21065) and the ratio of loan accounts per 1000 adults (42yrs) suggest
that the outreach of the formal financial sector in Bangladesh is lower than that in India (14485
and 124 respectively) and Pakistan (20340 population per branch and 47 loan accounts per
1000), according to the statement of IoF. Bangladesh Bank assumes that the new banks will help
increase the quality of banking services by increasing competition in the banking sector. They
will also be able to meet the unfulfilled demand for credit by the private sector whose needs have
grown in line with a fast expanding economy.
The central bank noted that, for new banks the ratio of opening rural and urban branch will be
1:1 which will help increase bank branches in rural areas and improve financial inclusion. But
the home truth is; no bank can expand in the rural areas before concentrating and making
business in urban areas. Earlier, the issue of granting licenses to new banks caused many to raise
their eyebrows. Questions were being asked by authentic experts, bankers and people even on the

The banking system of Bangladesh-Prospects &Challenges
board of directors of the central bank about the wisdom of allowing more banks, a sector that had
been struggling hard to cope with the problem of liquidity shortage for years together. The
banking sector is already saturated with 47commercial banks. There was no logic to allow new
banks at this moment of the country. The new comers will create an unhealthy competition in
banking services, affect stability of the sector and cause profitability of the existing banks to
suffer. The entry of more banks will trigger a flight of huge fund including Tk 36.00 billion from
existing banks to place as paid-up capital against new banks; this will lead to further
deteriorations of the stringent situation already prevailing in the banking sector.
The similar incident will take place for quality employees of the existing banks. All these will
lead to a greater mismatch between their credit and deposit ratio and acute shortage of good
bankers. The banks will be forced to go for risky investment after collecting deposit at high rate
from an already saturated market. It will seriously affect the overall bank- business and the
industry as well.
Banks are to facilitate all kinds of economic activities and finance many other needs of the
people, in both urban and rural areas. But overcrowding of the banking sector is not at all
desirable as this, instead of meeting those objectives, would create problems for the sector itself,
particularly the existing operators in the sector. This might even adversely impact the vital
sectors of the economy in the process.
It was unlikely that the board of directors of Bangladesh Bank were not aware of that fact. Yet
they were trying to select the right ones since the government is unrelenting in its decision to
allow new banks. Opening up of new banks on political consideration, as reported time and
again, may reduce the confidence of the clients in banks as well as impair the management
quality of the overall banking sector. Meanwhile, some speculators state that as soon as new
banks kick off their operations a heavy pressure on deposits of existing banks would be exerted.
The latter are likely to see a flight of deposits while their existing loan liabilities including non-
performing loans (NPLs) will remain at an unchanged level. This is likely to cause a mismatch
between their deposits and outstanding amount of credits or loan portfolio. Now that the central
bank already approved new banks and issued the LoIs, it will be just beating about the bush to
say anything to the contrary. Rather, now it is better to design how all these banks can be
managed smoothly. In this regard the following measures may be implemented:

The banking system of Bangladesh-Prospects &Challenges
The new banks should introduce new and innovative services and should scale up their products
for the sake of making the government decision meaningful.
There is no denying that the quality of the sponsors largely influences the quality of operation of
banks as such sponsors play an important role in the decision-making. So, the central bank will
have to closely examine the track records of the sponsors and it must not give in to political
pressure of any sort on this issue. The quality of the bank directors should be maintained
scrupulously.
The central bank may concentrate its attention on the color of money of the proposed directors
who will be investing as the paid-up capital.
The central bank must have to play the role of a watchdog in case of shopping the investment
clients of new banks from existing banks by approving the higher limit then the present
outstanding.
The central bank must have to be vigilant in examining the proposed investment clients of new
banks, particularly those whose cases have to be rescheduled. Getting rescheduled, the sick
clients in the existing banks become very much performing in new banks for the time being in
the backdrop of opening new banks in the market.
The central bank needs to require to consider several other issues, prior to giving effective
permission to new banks, including ownership quality.
The vital issue that deserves priority attention of both central bank and the government is better
banking coverage of the hitherto neglected rural areas. The new banks may be asked to serve the
rural people extensively.
On the top of everything, both the central bank and the government will have to ensure the entry
of stronger players in the banking arena and keep close watch on the effects of such an entry on
the overall banking industry.
The Bangladesh Bank and Bangladesh Institute of Bank Management (BIBM) have to take
preparation on structuring the banks by training up the bankers. Because market will be
oversaturated as soon as the new banks start operations. The precipitations of banks may appear

The banking system of Bangladesh-Prospects &Challenges
at the bottom of the banker of banks in Bangladesh. Time has arrived; the possibility of merger
of weak banks cannot be laughed away.
Still we hope for the best. The newly approved three NRB commercial banks namely, NRB
Commercial Bank Ltd, NRB Bank Ltd and NRB Bank Ltd will bring USD150.00 million as paid
up capital of the non-resident Bangladeshis (NRBs). Expectations of the people about the six
approved PCBs, such as Union Bank Limited, Modhumoti Bank Limited, the Farmers Bank
Limited, Meghna Bank Limited, Midland Bank Limited and South Bangla Agriculture and
Commerce Bank Limited, are quite high. Now the nation is passionately staring at the functions
of the new-born banks with a ray of hope of even development of the people of all the strata in
the days to come.
Concluding Remarks:
In fact, the banking system followed true financial liberalization policy since the beginning of
1990s especially with the introduction of FSRP. Since then, several legislations related to the
financial sector were enacted and amended to support the reform process. The newly enacted
laws responded to the need for promoting a sound and orderly financial markets by providing
appropriate legal framework for the licensing, organizing, operating, and supervising of a broad
range of financial services companies. All the depository institutions were brought under the
regulatory jurisdiction of Bangladesh Bank and all of them are monitored and supervised by the
central bank by issuing prudential regulations.
The reform measures have had major impact on the overall efficiency and stability of the
banking system of Bangladesh. A good number of banks and other financial institutions with
various types of financial instruments emerged up. The institutional network and volume of
operations of the financial sector have expanded and diversified. A number of scheduled banks
have gone up from 11 in 1980 to 47 in 2011. The banks' involvement in non-traditional
activities and the increase in profits from these activities have contributed to improvements in
banking sector performance in terms of profitability, cost efficiency, and earnings efficiency.
Banks were allowed to engage in diverse activities including securities and foreign exchange
transactions, brokerage and dealing activities, and other fee-based business.

The banking system of Bangladesh-Prospects &Challenges
The expansion of the scope of banks business has certainly helped offset a decline in net
interest income from advances. This has an important policy implication for the sequencing of
financial liberalization. Likewise number of non-bank financial institutions have also been
increased. Additionally, the development of new financial instruments and services,
introduction of regulatory framework and institutionalization of savings facilitated for
economic growth and development. The present capital adequacy of banks is comparable to
those at international level. There has been a marked improvement in the asset quality with the
percentage of gross non-performing assets (NPAs) to gross advances for the banking system
reduced from 41.1 percent in 1999 to 7.1 percent in 2011. The reform measures have also
resulted in an improvement in the profitability of banks. The Return on Assets (ROA) of the
banks rose from 0.0 percent in the year 2000 to 1.3 percent in 2011. Further SCBs have steadily
improved their cost efficiency (measured by expenditure income ratio) after 2008 even though
FCBs and PCBs generally performed better than SCBs and DFIs in terms of profitability and
cost efficiency in their initial stage. This suggests that the banking sector reforms since 1990
have exerted increased pressure and, thus had a positive moderate impact on the performance
of SCBs and tiny impact on DFIs. However, it should be stressed that this does not imply that
the reforms have had wholly satisfactory results, for the following reasons.
First, the banking system is still found to be geographically fragmented, distorted and
noncompetitive even in the post-reform period. The public sector banks (SCBs and DFIs) have
remained more or less dominant in the banking sector. Still SCBs and DFIs hold 32.9% of
deposits and 34.6% of advances of the banking sector of Bangladesh. Second, profitability of
SCBs has remained small where in case of DFIs it is less than 1.0 percent even worst (negative)
during the whole period. This is because public sector banks have continued to suffer from
poor management skills, over branching, and overstaffing. Although their NPLs ratios have
gradually declined, the ratios have remained high.
Some public sector banks (mainly DFIs) have been suffering from the shortage of capital,
demanding further recapitalization. Third, given that SCBs and DFIs enjoy scale of advantages
because of their nationwide branch networks (especially compared with PCBs and FCBs,
which tend to compete in the retail market). The current approach, therefore, for improving
their performance without rationalizing them may not have further and substantial benefits for
banking sector. As 30 years have passed since the reforms were initiated and SCBs and DFIs
have been exposed to the new regulatory environment and pressures, it may be time for the

The banking system of Bangladesh-Prospects &Challenges
government to take a further step for promoting the quality of managements and assets of banks
and for closing unviable branches.
Fourth, problem of banking system is "systemic" not related to the banking system only.
Reforms only in the SCBs, keeping away the DFIs and non-bank financial institutions (NBFIs),
may not generate desired results. Therefore, the scope of reforms should also be extended to
other organs of the financial system to make the financial system more resilient and stable. In
addition, initiatives are required to be taken to address the problems of sick banks and to
improve the performance of SCBs and DFIs by way of adopting effective risk management
techniques and undertaking efficient monitoring of their credit portfolios. So the Government
should give the highest priority to take reform measures for reforming DFIs and NBFIs and
liberalizing the whole commercial banking sector, through careful consideration of the various
aspects indicated above in the next reform agenda. Finally, in the current scenario, banks are
required for constantly pushing the frontiers of risk management compulsions arising out of
increasing competition, as well as agency problems between management, owners and other
stakeholders.
In addition, banks are also required to look at newer avenues to augment revenues, while
trimming costs. Consolidation, competition and risk management are no doubt critical to the
future of banking but one should believe that governance and financial inclusion would also
emerge as the key issues for a country like Bangladesh at this stage of socio economic
development.
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