The Banking System of Bangladesh: Prospects & Challenges Analysis

This term paper, prepared for IBAIS University, provides a detailed analysis of the banking system in Bangladesh. It begins with an introduction to the role of banks in economic development, followed by a brief historical overview of banking. The report defines the term 'bank,' exploring its evolution and functions, and then delves into the banking system of Bangladesh, discussing its structure, challenges, and prospects. The paper covers the post-independence nationalization of banks, the introduction of private and foreign banks, and the issues of loan defaults and irregularities. It also touches upon the role of the Bangladesh Bank in regulating the sector. The paper highlights key aspects such as the banking system's impact on the economy, its role in mobilizing savings, and the importance of providing loans for production. The report aims to give a comprehensive understanding of the banking sector's current state, future challenges, and opportunities for growth within the context of the Bangladeshi economy. The banking system's significance is assessed, including its impact on economic development, its role in savings mobilization, and the provision of loans to various sectors.

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):