Banking in Bangladesh

Banks operate by borrowing funds-usually by accepting deposits or by borrowing in the money from individuals, businesses, financial institutions, and governments with surplus funds such as savings. The most common uses of these funds are to develop real estate or give out loans for commercial and industrial usage. Economic history shows that development has started everywhere with the banking system and its contribution towards financial development of a country is the highest in the initial stage. Schumpeter (1933) regarded the banking system as one of the two main agents (other being entrepreneurship) in the whole process of development. Keynes also emphasized the role of banking services in the process of economic development of a country, while she was addressing the House of Lords regarding International and Monetary System (quoted in Sharma 1985). Moreover Alexander Gerashchenko (1962) in his popularly known “Gerschenkron’s Hypothesis” explained the banking system as the key role player at certain stage of the industrialisation process.

There were no domestic private commercial banks in Bangladesh until 1982; when the Arab-Bangladesh Bank Ltd. commenced private commercial banking in the country. Five more commercial banks came up in 1983 and initiated a moderate growth in banking financial institutions. Despite slow growth in number of individual banks, there had been a relatively higher growth of branches of nationalised commercial banks (NCBs) during 1973-83. Their number had increased from 1512 in 1973-74 to 4603 in 1982-83. Established in 1784, the Bengal Bank was the first British run modern bank in India. Dhaka Bank started to operate as a commercial bank in 1806. The Bengal Bank opened its first branch in Dhaka by purchasing Dhaka Bank in 1862. In 1873, it opened its two branches in Sirajganj and Chittagong. Another branch of Bengal Bank was opened in Chandpur in 1900. Six branches of Bengal Bank were in operation in the Bangladesh region until the partition of Bengal in 1947 and these branches were located at Dhaka, Chittagong, Mymensingh , Rangpur, Chandpur and Narayanganj.

The three Presidential banks that followed the establishment of the Bengal Bank were the Bank of Calcutta (1806), Bank of Bombay (1840) and Bank of Madras (1843). Combining these three banks, the Imperial Bank of India was set up in 1921. The Reserve Bank of India came into being in 1935. In addition to the above, there were other banking and financial institutions throughout British India, including the territory of Bengal. Other banking institutions established in East Bengal during the British period were the loan offices at Faridpur (1865), Bogra (1872), Barisal (1873), Mymensingh (1873), Nasirabad (1875), Jessore (1876), Munshiganj (1876), Dhaka (1878), Sylhet (1881), Pabna (1882), Kishoreganj (1883), Noakhali (1885), Khulna (1887), Madaripur (1887), Tangail (1887), Nilphamari (1894) and Rangpur (1894). Banks established in this period included the Kurigram Bank (1887), Kumarkhali Bank (1896), Mahaluxmi Bank, Chittagong (1910), Dinajpur Bank (1914), Comilla Banking Corporation (1914) and Comilla Union Bank (1922). Major Indian banks of the period having branches in the territory were the National Bank of India (1864), Bengal Central Bank (1918), New Standard Bank (1920), Imperial Bank of India (1921), Pioneer Bank (1923), Bank of Commerce (1929), United Industrial Bank (1940), Habib Bank (1941) and United Commercial Bank (1942).

During the Mughal period, there were different types of gold coins in circulation that encouraged people to engage in monetary transactions and profit-motivated financial activities. Many individuals and some families attained special reputation in trading and in finance. One such family, that of Jagat Sheth, had branches of its monetary business in Dhaka, Hughli and Murshidabad. Mughal rulers patronised the banking business of Jagat Sheth family and others, and also used to borrow money from them when needed. People could convert their valuables, mostly gold and silver, into currency with minimum cost at Mughal mints. Monetary transactions and transfer through hundi (bill of exchange) along with cash transaction, was in vogue during the Mughal period. The revenue received from Zaminders and dues therefrom were sent to the government treasury through family-based financial or banking institutions. People from different classes were also involved in monetary trading which helped the evolution of banking in that period. A major landmark was the establishment of the Hindustan Bank in 1700 AD at Calcutta. After the stewardship of Bengal, Bihar and Urissha was assumed by the East India Company, Jagat Sheth's family and other traders in money and finance suffered great losses in their business because of the activities of a new elite subservient to British rulers. The decline in banking brought some instability in the economy of that time and, upon quick realisation of the fact, the British set up the English Agency House. After the birth of Pakistan in 1947, the State Bank of Pakistan, the central bank of the country, came into being in 1948. Later, the National Bank of Pakistan, a commercial bank was set up in 1949.

In all, 36 scheduled commercial banks were in operation throughout Pakistan. Pakistanis owned most of these banks. Only three of them, namely, National Bank of Pakistan, Habib Bank, and the Australasia Bank had a branch in East Pakistan in 1949. During 1950-58, three other Pakistani-owned banks, the Premier Bank, Bank of Bawalpur and Muslim Commercial Bank had opened branch offices in East Pakistan. Four Pakistani-owned banks, the United Bank, Union Bank, Standard Bank and Commerce Bank conducted business in the province during 1959 - 1965. The province had only two banks owned by local business groups and with headquarters at Dhaka, the Eastern Mercantile Bank (now Pubali ) and Eastern Banking Corporation (now Uttara), established in 1959 and 1965 respectively.

Bangladesh Bank the central bank as well as chief authority to regulate the state's monetary and financial system, was established in Dhaka as a body corporate vide the Bangladesh Bank Order, 1972 (P.O No. 127 of 1972) with effect from 16th December, 1971. Bangladesh Bank started functioning with all capital and liabilities of Dhaka branch of State Bank of Pakistan. Bangladesh Bank, as a central bank, reserve bank, or monetary authority, is the banking institution granted the exclusive privilege to lend the government its currency. Like a normal commercial bank, Bangladesh Bank charges interest on the loans made to borrowers, primarily the government, and to other commercial banks, typically as a 'lender of last resort'. However, a central bank is distinguished from a normal commercial bank because it has the monopoly on creating the currency, which is loaned to the government in the form of legal tender. It is a bank that can lend money to other banks in times of need. Its primary function is to provide and monitor the nation's money supply, but more active duties include controlling subsidized-loan interest rates, and acting as a lender of last resort to the banking sector during times of financial crisis (private banks often being integral to the national financial system). Bangladesh Bank, as a central bank, also has supervisory powers, to ensure that banks and other financial institutions do not behave recklessly or fraudulently.

The banking system at independence (1971) consisted of two branch offices of the former State Bank of Pakistan and seventeen large commercial banks, two of which were controlled by Bangladesh interests and three by foreigners other than West Pakistanis. There were fourteen smaller commercial banks. 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 specialised 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.  Denationalisation and private industrial growth led the Bangladesh Bank and the World Bank to focus their lending on the emerging private manufacturing sector. Scheduled bank advances to private agriculture, as a percentage of sectoral GDP, rose from 2 percent in FY 1979 to 11 percent in FY 1987, while advances to private manufacturing rose from 13 percent to 53 percent.

Bangladesh has eight Islami banks, while several non-Islamic banks offer Islamic-banking services alongside their normal operations. As of 2017, Islamic banking, led by Islami Bank Bangladesh controls 20 percent of deposits in Bangladesh. Bangladesh operates the world’s biggest Islamic Microfinance scheme. According to Bangladeshi government polls, Islamic banking has an overall approval rating of 84 percent among the country's population.

The eight state-owned commercial and specialised banks suffer from problems related to high levels of non-performing loans (NPLs), low profitability, large capital shortfalls and balance sheet weaknesses. The root of the problem is poor risk management. For decades, state-owned banks have lent large amounts to big, influential borrowers, who have been known to be lax with repayments.

Defaulters are rarely penalised, instead, loans are routinely restructured to permit further lending to the same borrowers. According to a study by the Bangladesh Institute of Bank Management, on an average banks rescheduled bad loans of BDT 109.1 billion annually during 2010–14.

In its report, the IMF said that there were weaknesses in the banking sector owing largely to the legacy of loans to large borrowers, who lack incentives to repay, and legal limitations that hamper recoveries. Six state-owned commercial banks account for about a quarter of total banking sector assets. They are supplemented by two state-owned specialised development banks, 40 private commercial banks and nine foreign banks. As a result of these issues, non-performing loans (NPLs) at state-owned banks have risen sharply in recent years. In January-March 2017, overall, bad loans in the banking sector rose by 18 percent from the previous quarter, to BDT 734.1 billion. NPLs at the six state-owned commercial banks rose by 15.1 percent quarter on quarter, to BDT 357.2 billion, accounting for just under half of total NPLs.

It is possible that the problem may be larger than these numbers suggest. Central bank inspections have found that several state-run and other commercial banks have under-reported bad loans and inflated profits. For example, in the quarter ending December 2016, four state-owned commercial banks (Janata Bank, Agrani Bank, Rupali Bank and Sonali Bank) under reported BDT 40.7 Billion in loan defaults. Unsurprisingly, these high NPLs have hit profitability hard. In 2016 the operating profits of the six state-owned commercial banks dropped by 37 percent annually, to BDT 20.1 Billion, while net losses surged by 309 percent, to BDT 5.1 Billion. Meanwhile, losses at the two state-owned specialised banks (Krishi Bank and Rajshahi Krishi Unnayan Bank) rose by 150 percent, to BDT 4.2Billion. By contrast, the net profits of the banking sector as a whole rose by 4.9 percent in 2016, while those of private banks rose by 17.2 percent.

The higher provisioning necessary against these NPLs has also weakened banks' capital. By the end of the first quarter of 2017, seven of the eight state-owned banks had capital shortfalls, summing up to BDT 147 Billion, compared with only two private banks with shortfalls.

The highest capital shortage was at Bangladesh Krishi Bank (BDT 72.5 bn), followed by BASIC Bank (BDT 29.6 bn) and Sonali Bank (BDT 25.6 bn). The overall capital to risk weighted assets ratio (CRAR), a key measure of bank strength and stability, has also been affected. The CRAR for all banks in Bangladesh by end-March was 10.7 percent, meeting the regulatory requirement of 10.6 percent.

The CRAR at private banks was 12.2 percent, while that at the nine foreign banks was a healthy 23.9 percent. However, the CRAR of the six state-owned commercial banks was only 5.9 percent, while that of the two specialised state-owned banks was an astonishing -35.23 percent. Last year BB gave banks a roadmap to implement the Basel III framework from January 2016, under which their CRAR will rise to 12.5 percent by 2019, which will put further pressure on bank capital. The Non Performing Loan among the private banks also show a dismal picture.  Few of these banks are even having capital shortfall. As a result of the mounting Non Performing Loan, the Performing clients of the banking industry are charged higher interest rates. The formation of assets management companies or centralised debt recovery units separate from the bank can be useful to address the Non Performing Loan situation. On the other hand, banks can establish a Good Bank- Bad Bank approach, whereby the Good Bank will be engaged in procuring and managing good assets while the Bad Bank will focus on managing the delinquent portfolio.

Banks play a very important role in materialising the dream of making Digital Bangladesh a reality. The mobile banking and agent banking model is boosting the rural economy of Bangladesh by way of giving access to unbanked population.

It’s true that there are few scams that took place in Bangladesh Banking industry. But this is not in isolation in Bangladesh only. Recent scams in neighbouring country India or even in developed economies (sub prime crises, Meidoff Ponzi schemes are few to name). What is needed now is reforms including reinforcement in infrastructure, man power training and self governance. The healthy banking sector is a prerequisite for us to promote to developed economy from the status of a developing economy.