TABLE OF CONTENTS Executive Summary Chapter 1: Introduction 1.1. Origin of the report 1.2. Scope 1.3. Objective 1.4.

Methodology 1.5. Limitations Chapter 2: Literature review Chapter 3: Introduction to privatization Chapter 4: Privatization in Bangladesh 4.1. Objectives of privatization 4.2. Privatization policy in Bangladesh Chapter 5: Overview of the financial sector in Bangladesh Chapter 6: Overview of a privatized bank: Uttara Bank Limited Y.1. Background and history of Uttara Bank Limited Y.2. Objectives of privatization (Uttara Bank Limited) Y.3. Development of Uttara Bank Limited after privatization Y.4. Problems persisting from the pre-privatization period Chapter 7: Comparison between a privatized and a nationalized bank: Uttara vs Janata Z.1. Problems generally faced by NCBs Z.2. Background and history of Janata Bank Z.3. Comparison of performance between Uttara and Janata Z.4. Camel rating: a global approach of evaluating bank performance Chapter 8: Conclusion and Recommendation

CHAPTER 1: INTRODUCTION 1.1 Origin of the Report: This report has been prepared for Sheikh Morshed Jahan, course instructor, Macro Economics (G 203) as a partial requirement for the course. 1.2 Scope: This study aims to focus on the impact of privatization on the financial sector of Bangladesh. It is limited to the comparison between Uttara Bank Ltd, a representative of privatized banks and Janata Bank as a representative of nationalized commercial banks (NCB). 1.3 Objective: The primary objective of the report is to focus on the effects of privatization in the banking arena of our country in terms of the performance of two selected banks. The secondary objective includes To analyze the growth and development of privatized banks on the basis of observation on pre & post privatization period. To compare the present performance of Privatized banks and NCBs . 1.4 Methodology: Primary Data We have conducted formal interviews with the officials of various NCBs and privatized banks operating in the country in order to find out in what specific ways the two types differ. Secondary Data We have collected relevant information from websites, annual reports of the companies, previous literature and research papers in this field, articles from news papers. The reference sources have been properly attributed.

1.5 Limitations: Perfect picture of the privatized banks could be obtained if all three privatized banks were considered in the study. However we focused on only one privatized bank to concentrate on various angles of privatization. Janata Bank does not maintain their online database properly and so it was somewhat difficult to obtain all the informations. While interviewing the bank officials and taking reference from journals, we came across some technical terms which we failed to grasp. The banks were understandably cautious to criticize their present internal management related problems.

We tried to collect information on changes in customer service after privatization in Uttara Bank. However we couldnt interview any current customer who also received service in 1983.

CHAPTER 2: LITERATURE REVIEW

Privatization of the Banking Sector in Bangladesh Generally, privatization is regarded as a positive phenomenon because only the privatized sector can provide quality products and services at the lowest price possible. However, observed from the vigilant perspective of economics, privatization is a much more complicated process. According to What is Privatization? a publication of http://www.privatization.org/database.html privatization can be defined as the transfer of delivery of goods and services from the government to the private sectors. The publication also states that there can be different categories of privatization, depending upon the level of government involvement. The government may decide to have very little involvement with the private sector, or create partnership with the private sector where the government itself plays a dominant role. Elaine Kamarck, who headed Al Gores National Performance Review, is quoted saying: When we talk about privatization, we don't mean contracting out. We mean purely divesting the government function . This is often carried out by selling government-owned assets to the private sector, and often by creating a private-public partnership in different sectors of the economy. The impact of privatization may vary according to the sector it is being implemented upon. According to Empirical Studies of Bank Privatization: Some Lessons by George R.G. Clarke, Robert Cull, and Mary Shirley, when it comes to the finance sector the privatized banks outperform the state-owned banks by a significant margin. The paper argues that there was a time when state-owned banking system was considered to be a more tangible means of ensuring greater financial development. However, recent observations have revealed that state-owned banking sector is associated with less financial development and lower productivity. This is more predominant in developing countries where the government has been guilty of exploiting the banking sector for political benefit. Privatization of banks, particularly in the developing countries, stops such malevolent government intervention, and creates a more professional and competent finance-sector that contributes to the growth of the economy. Privatization of the banking sector, however, has very little or no performance benefit if the government retains a considerable amount of control in the stake ownership of the banks. The paper ( Empirical Studies of Bank Privatization: Some Lessons) argues that privatization of the banking sector performs well even in poor regulatory environments. Hence, it is better to privatize even with poor regulations than wait for reforms that may arrive too late.

Reform often acts as an incentive to privatize. As quoted from Privatization in Bangladesh Opportunities and Potential published at www.pc.gov.bd/brochure.pdf: Privatization programs got its virtual start in Bangladesh in the midseventies. The first round of privatization was put to work following the post independence thrust on economic growth. The second phase of privatization (or denationalization) took place in the first half of the 1980s and covered jute and textile mills owned originally by Bangladeshi citizens prior to independence. As the years progressed, more and more industries in Bangladesh have been privatized, and finally in 20 th March 1993 the Privatization Board was formed. On 30th July 2000, Privatization Commission replaced the Privatization Board. The paper (Privatization in Bangladesh Opportunities and Potential ) goes on to state that one of the major objectives of privatization in Bangladesh is to alleviate the social and economical infrastructure of the country with efficiency gains. Privatization is also expected to increase foreign inflows and create more employment opportunities. The Government of Bangladesh (GOB), in consultation with the Privatization Commission, designs policies on privatization of public, industrial and commercial enterprises. Following which, eligible investors participate to bid in tenders. The money obtained from privatization is first expected to meet the liabilities of the organization concerned. Any remaining amount is deposited in the consolidated fund of the Peoples Republic of Bangladesh. As far as the banking sector is concerned, there are 4 Nationalized Commercial Banks (NCB), 5 Nationalized Specialized Banks, 30 Private Commercial Banks, 9 Foreign Commercial Banks and 28 non-bank financial institutions in Bangladesh. According to the paper Financial Sector Policy Stance published at http://www.bangladeshbank.org/pub/halfyearly/financialsrevdec06/chap6.pdf in order to establish a sustainable economic growth, the finance sector of Bangladesh has to soon reach the fast growing economy standards of the rest of the world. The perpetual failure of the Nationalized Commercial Banks (NCB) in Bangladesh has ruined competitiveness in the banking sector. As a result, the banking sector of Bangladesh has proceeded in two separate directions: state-owned banks in one and private banks in another. Under such circumstances, the proposed sale of Rupali Bank to an international buyer and the recent decision to mould the remaining three NCBs into a corporate-structure might as well be considered vigilant. The paper also suggests that converting NCBs into corporate entities might see the advent of new entrants in the stock market. However, such privatization must be carried out under strict regulations, and be made transparent to the public. Once the state-owned banks have been restructured the general public, especially the poorer people, will not only have an access to better financial services, but the overall economy of the country will alleviate due to a strengthened financial infrastructure.

Chapter 3: Introduction to Privatization In 1969, famed management guru Peter Drucker published a paper called The Age of Discontinuity, in which he predicted the modern day transition from the industrial age to the information age. According to Drucker, this transition was to be accompanied by profound, transformation in society, business, and government. Ducker also predicted in that publication that the government would eventually repirvatize its state run organizations and return it to its private market place. Robert Poole, founder of the reason foundation, was so intrigued by the term reprivatize that when he began writing about outsourcing municipal services in the early 1970s. he popularized this whole concept of turning State Operated Enterprises(SOE) into private firms by calling it Privatization Thus the term Privatization was formed. Over the years, privatization has taken many meanings. But what does it actually mean? In its purest form, the term refers to the divestiture of government owned assets like airports, rail systems, real estate holdings, and oil production facilities*. This means that the private sector would take over some of the government run enterprises and run them as business entities. As this concept has got along and settled itself among the society, it is now used virtually to describe the greater amount of private sector participation in providing services. Using this concept alone, multi-billion dollar public-private highway, bridge, and tunnel projects are operating or under construction across the United States, in Australia, Canada, Italy, France, and other countries. Privatization in all forms introduces market based competition in government enterprises. This benefits the general public because it leads to better, cheaper and higher quality of services provided to them and in greater varieties. Adrian Moore, Vice President of Reason, offers a concise articulation of the benefits of privatization: Privatization exposes things we otherwise would not seeideas, processes, innovations in service delivery. Within government rarely is success adequately rewarded, and innovation and new ideas are often quashed. But when privatization brings competition, accountability, and a chance for customers to have a say, then excellence and innovation are rewarded, and mediocrity and failure are penalized. A variety of alternative service delivery techniques can be employed to maximize efficiency and increase service quality. Some methods will be more appropriate than others depending on the service. In searching for ways of cutting costs and increasing delivery, consider using a combination of these techniques:

Contracting Out (also called "outsourcing"). The government competitively contracts with a private organization, for-profit or nonprofit, to provide a service or part of a service.

Management Contracts. The operation of a facility is contracted out to a private company. Facilities where the management is frequently contracted out include airports, wastewater plants, arenas and convention centers. Public-Private Competition (also called "managed competition," or "market testing"). When public services are opened up to competition, in-house public organizations are allowed to participate in the bidding process. Franchise. A private firm is given the exclusive right to provide a service within a certain geographical area. Internal Markets. Departments are allowed to purchase support services such as printing, maintenance, computer repair and training from in-house providers or outside suppliers. In-house providers of support services are required to operate as independent business units competing against outside contractors for departments business. Under such a system, market forces are brought to bear within an organization. Internal customers can reject the offerings of internal service providers if they dont like their quality or if they cost too much. Vouchers. Government pays for the service; however, individuals are given redeemable certificates to purchase the service on the open market. These subsidize the consumer of the service, but services are provided by the private sector. In addition to providing greater freedom of choice, vouchers bring consumer pressure to bear, creating incentives for consumers to shop around for services and for service providers to supply high-quality, low-cost services. Commercialization (also referred to as "service shedding"). Government stops providing a service and lets the private sector assume the function. Self-Help (also referred to as "transfer to non-profit organization"). Community groups and neighborhood organizations take over a service or government asset such as a local park. The new providers of the service also are directly benefiting from the service. Governments increasingly are discovering that by turning some non-core services such as zoos, museums, fairs, remote parks and some recreational programsover to non-profit organizations, they are able to ensure that these institutions dont drain the budget. Volunteers. Volunteers are used to provide all or part of a government service. Volunteer activities are conducted through a government volunteer program or through a non-profit organization. Corporatization. Government organizations are reorganized along business lines. Typically they are required to pay taxes, raise capital on the market (with no government backingexplicit or implicit), and operate according to commercial principles. Government corporations focus on maximizing profits and achieving a favorable return on investment. They are freed from government procurement, personnel and budget systems. Asset Sale or Long-Term Lease. Government sells or enters into long-term leases for assets such as airports, gas utilities or real estate to private firms, thus turning physical capital into financial capital. In a

sale-leaseback arrangement, government sells the asset to a private sector entity and then leases it back. Another asset sale technique is the employee buyout. Existing public managers and employees take the public unit private, typically purchasing the company through an Employee Stock Ownership Plan (ESOP).

Private Infrastructure Development and Operation. The private sector builds, finances and operates public infrastructure such as roads and airports, recovering costs through user charges. Several techniques commonly are used for privately building and operating infrastructure. o With Build-Operate-Transfer (BOT) arrangements, the private sector designs, finances, builds, and operates the facility over the life of the contract. At the end of this period, ownership reverts to the government. o A variation of this is the Build-Transfer-Operate (BTO) model, under which title transfers to the government at the time construction is completed. o Finally, with Build-Own-Operate (BOO) arrangements, the private sector retains permanent ownership and operates the facility on contract.

Chapter 4: Privatization in Bangladesh Privatization programs got its virtual start in Bangladesh in the mid-seventies. The first round of privatization was put to work following the post independence thrust on economic growth. The second phase of privatization (or denationalization) took place in the first half of the 1980s and covered jute and textile mills owned originally by Bangladeshi citizens prior to independence. The Revised Investment Policy designed in 1975 put much emphasis in the development of private sector providing enormous incentives to spur private investment. A Disinvestment Board was set up and a total of 255 SOEs were privatized in between 1975 to 1981 and about 115 of these SOEs, were divested through the office of the then Director General of Industries (DGI). The New Industrial Policy (NIP) of 1982 marked a major shift towards privatization where total of 222 SOEs got privatized under the NIP 1982. The privatization programs gained gradual momentum and government made liberal Industrial Policy in 1991, where 42 enterprises were identified for privatization. On its further move, the number of enterprises was increased to 62 by adding 20 textile mills under the Asian Development Bank (ADB) sponsored Industrial Sector Program. In the meantime, the government created an Inter-Ministerial Committee on Privatization (ICOP) in the year 1991 to develop a privatization policy. In 1993 Privatization Board was setup and assigned with the responsibility of privatizing State Owned Enterprises identified by the Government. Subsequently, the Privatization Board was converted into a Commission delegating more administrative and financial authority to intensify the privatization program drive. 4.1. Objectives of privatization: 1. Social welfare through efficiency gains. Realizing the growth and increasing role of private sector Industrial, commercial and service enterprises in terms of their quality, quantity, management efficiency. Privatization of SOES assumed as a better solution to contribute to the expansion of existing units, GDP, increase in employment opportunities including other socio economic benefits. 2. Inflow of foreign investment, improvement of efficiencies & development Of mutual ties. A well founded privatization program is better able to attract foreign investment having far reaching effects on management efficiency & technology. 3. Receipt of Revenue. Minimizing the financial pressure on the Government-exchequer, stimulating the proactiveness to face constraints to respond to the market demand due to obsolete machinery, poor productivity, poor management, cost ineffectiveness and under capacity utilization etc. and also to maximize productivity and revenue earnings from the sales proceeds of the products, privatization program sounds effective.

4. Diversification of the public sector resources from loss-making enterprises to other socially useful enterprises. To carry out paradigm shift in reduction of continuous financial loss, it is crucial to transfer the SOES to the private sector where efficiency and potential re-investment scope is available. It will immediately help the government to tighten the money burden and free to grant enormous subsidy to the losing sector. More over the privatization will assist the government to divert the fund to the socially useful project like education, health service, defense, social security and poverty alleviation. 5. Creation of employment opportunities and its protection through widespread competitiveness. Privatization is helpful to create more employment opportunities improving operational, production, management and plant utilization efficiency. It therefore, in the long run will tremendously be useful to create more employment opportunity and make substantial contribution to GDP. 4.2. Privatization policy in Bangladesh: Objectives The stated objective of the authorities privatization policy is to increase the role of the private sector in order to accelerate economic development. The policy states that any public enterprise may be sold, irrespective of the size of its fixed asset, market share, or profitability. An implicit assumption of the policy is that the financial rate of return to capital in the private sector is or shall be greater than the financial rate of return in the public sector. The authorities want to privatize because they assume that the social gains from private sector profits will be greater than the social gains from the public sector profits. The authorities expect that as the share of the private sector in the level of activity increases the rate of economic growth will rise. Institutional Setting The state has given the Privatization Board the authority for privatizing public enterprises in Bangladesh. In the near future substantial number of public enterprises will be privatized. The Board announced that its goal is to privatize, during the financial year 1997-98, 54 public enterprises in various sectors. The list of firms to be privatized include textile mills (15 firms); jute mills (7 firms); steel & engineering companies (9 firms); sugar & food companies (9 firms); chemical companies (8 firms); forestry-related companies (4 firms); and two firms in other sectors. In order to strengthen its program, the authorities shall soon introduce a Privatization Bill in the National Parliament for its approval. The Method of Privatization The policy states that the enterprises can be sold either by international tender or public offer of shares. The authorities are expected to use a variety

of methods in privatization: International tendering, offloading of shares in the capital market, auctioning, negotiated sales, and so forth. The authorities have declared that they would prefer to use Employee Stock Option Program (ESOP) if the workers of the enterprise are willing to buy it. Preparation for Privatization and Valuation The assets and the liabilities of the enterprises will be valued by a selected accounting firm, using one or more generally accepted accounting methods, subject to review by the authorities and, if necessary, revaluation by another selected accounting firm. The authorities will provide the valuation report and other relevant documents, including three years financial and performance data of the firm, to potential buyers. The authorities should try to ensure that there is no collusion between the accounting firm and the potential buyer. Collusive practice would undermine the point of carrying forth the valuation exercise. Terms and Conditions of the Sale The policy states that there shall be no provision for writing-off long-term debt of the enterprise that will be privatized. The buyer shall assume the long-term liabilities for the firm upon transfer. The short-term liabilities, such as claims of workers and incomes taxes, shall be assumed and be written-off by the state. If the value of the assets exceed bank loans, then the buyer will have to pay the excess amount either in cash or within one year along with a simple interest rate of 10 percent. Short-term and long-term liabilities have to be clearly defined prior to privatization. A clear and consistent demarcation of liabilities needs to established and upheld. The policy also states the buyer shall assume full legal responsibility for all pending court cases against the enterprise. Bank Guarantees When the price is not paid in cash, the buyer is required to provide a bank guarantee. But a guarantee from a bank with poor asset quality, low profitability, and poor management is worth very little. Discipline in the banking and the non-banking financial system is necessary for the success of the privatization policy because otherwise there will be both incentives and means for rent-seeking. Without proper incentives, buyers may borrow from banks against collateral of little value, refuse to repay bank loans, try to delay payments to the state, and so forth. Land Use Constraint The policy states the land of the firm may be used only for industrial purposes. This provision may have been set to deter buyers from buying the enterprise for its land value rather than for operating the given enterprise as a manufacturing unit.

Market Valuation and Tendering Generally the market price reflects the "value" of the firm, provided it is being valued in a well-functioning and informed market place, composed of a rather large number of agents. The authorities can establish an appropriate reservation price for the firm to be privatized. If the bid price is lower than the reservation price, then the authorities can convert the public enterprise into a joint stock company and sell its shares. When a strategic buyer, who is willing to pay above the reservation price, is not forthcoming, the state can use initial public offer scheme. The policy has provisions for such procedures to be followed. Features of the Fledging Capital Market in Bangladesh and its Effect on Privatization The capital market in Bangladesh is attenuated. It does have potential for growth; it is evolving. There are two stock exchanges in Bangladesh: Dhaka Stock Exchange and Chittagong Stock Exchange. Dhaka Stock exchange, based in the capital city, is older of two, whereas Chittagong Stock Exchange, based in the main port city, is recently established. Dhaka Stock Exchange was incorporated in April 1954 as East Pakistan Stock Exchange and commenced trading in 1956. Chittagong Stock Exchange was incorporated in April 1995 and commenced trading in October 1995. Dhaka Stock Exchange has 195 members and Chittagong Stock Exchange has 124 members. At both exchanges, trading is now automated. Both exchanges trade in equity shares, debentures, and mutual funds. The privatization policy assumes a developed, fairly competitive, and efficient capital market, including a market for corporate control. The Proceeds from Privatization and Labor Issues Under present policy, the revenue from privatization accrues to the Government of Bangladesh. Funds from privatization should be used for (a) workers compensation (severance payments), and (b) labor training and relocation programs. Labor retraining program shall improve labor productivity. Privatization of Monopolies and Regulatory Framework The present policy framework does not contain any mechanism for creating and enforcing regulatory and competition policies. If the authorities carry forth the privatization program, then the state would eventually also transfer public monopolies in utilities, infrastructure, and communications to the private sector. Speed, Time Framework, and Program Effectiveness The authorities had announced that 54 firms are to be privatized within the financial year 1997-98. The parameters and scope of privatization has not yet

been agreed upon at the highest level. The policy does not provide a time framework for the completion of the privatization program in Bangladesh. If followed accordingly, an indicative timetable for privatization, with set goals for each stage of privatization, would send strong signals to investors and create confidence in the authorities commitment to an effective and goaloriented privatization program. According to the policy, the state shall ensure that the transfer of the privatized enterprises is complete within 90 days of signing of the agreement. The less delay there is in the transfer process, the better it is for corporate management.

Chapter 5: Overview of the financial sector in Bangladesh

Chapter 6: Overview of a privatized bank: Uttara Bank Limited 6.1. Background and history of Uttara Bank Limited: Uttara Bank-one of the largest and oldest private-sector commercial bank in Bangladesh, with years of experience. Adaptation of modern technology both in terms of equipment and banking practice ensures efficient service to clients. 207 branches at home and 600 affiliates worldwide create efficient networking and reach capability. Uttara is a bank that serves both clients and country. Uttara Bank formed in 1972 as a scheduled bank with assets and liabilities of the Eastern Banking Corporation set up in East Pakistan on 28 January 1965. It started banking business 22 June 1965 and became a member of the Dhaka Clearing House on 17 September 1965. At the time of establishment, Eastern Banking Corporation had a paid up capital of Tk 1.42 million and deposit resources of about Tk 10 million. It was the only scheduled bank formed with capital raised entirely from the small income group of people of East Pakistan. Eastern Banking Corporation was nationalized under the Bangladesh Banks Nationalization Order 1972 and its name was changed to Uttara Bank. At that time, the bank had 182 branches. The government retracted 95% of its share capital and allowed it to operate as a private bank. It was transformed into a limited company on 15 September 1983. On 31 December 2000, the authorized capital of the bank was Tk 200 million divided into 2 million ordinary shares of Tk 100 each. Its issued and paid up capital was Tk 100 million, of which Tk 5 million is subscribed by the government. The bank is listed with both Dhaka and Chittagong Stock Exchanges. The bank performs all traditional commercial banking functions. It renders agency services to the government in food procurement and collection of government revenue through the network of its branches all over the country. The total volume of foreign exchange business handled by the bank during 2005 amounted to Tk. 68560.2 million which comprised exports servicing Tk. 18191.8 million, imports financing Tk. 23092.4 million and remittances facilities Tk. 27276.0 million. The bank has correspondent relationships with 300 foreign banks/bank offices and exchange houses in 72 countries. With the objective of attracting the Bangladeshi wage earners abroad and the non-resident foreigners to invest in Bangladesh, the bank offered them the opportunity to open non-resident foreign currency deposit accounts and foreign currency current deposit accounts with it. Further, the bank floated Wage Earners' Development Bond and established Wage Earners Investment Cell. The bank has some other schemes to induce the wage earners to invest their savings in the securities market of the country. The volume of deposits at the bank in 1972 was Tk 4.43 million of which Tk 2.44 million comprised demand deposits. Prior to privatization in 1983, the deposits were Tk 21.81 million and their volume increased to Tk. 3689.19 million in December 2005. Total loans and advances including bills purchased

and discounted amounted to Tk 2.34 million in 1972 and Tk 21851.5 million in December 2005. The broad economic areas in which the bank provided lending and the total outstanding amount of advances to those areas up to 2005 were (a) agriculture and fisheries, (b) small and cottage, large and medium sized industry, (c) retail/wholesale trade and hotels and restaurants, (d) transport/communication and storage, (e) special credit programmes including POVERTY alleviation, (f) INSURANCE, real estate and business services, and (g) others. The management of the bank is vested in a 13-member board of directors consisting of a chairman and 12 directors. The managing director is the chief executive assisted by a deputy managing director and 2 assistant managing directors. In 2005, the bank had 207 fully computerized branches (159 urban and 48 rural) ensuring best possible and fastest services to its valued clients and the number of employees in all its branches 2,822 including 84 executives, 1,756 officers, 326 assistant officers, and 656 employees of nonofficer grades. The bank's branch banking is supervised through its 12 zonal offices in different parts of the country. The bank has more than 600 foreign correspondents world wide. The Head Office is located at Banks own 18storied building at Motijheel, the commercial center of the capital, Dhaka. 6.2. Objectives of privatization (Uttara Bank Limited): As discussed before, the primary objective of privatization is to utilize competition to improve efficiency and ensure that the resources employed earn the maximum returns. As such, the most important consideration in privatizing an enterprise is to ensure that once privatized, it will face adequate completion from other domestic and foreign enterprises and there will be incentive for profit and hence for cost reduction.***( Economic Policy Reform: The Second Stage by Anne O.) Other than these, there were a few specific facts that acted as reasons for choosing Uttara Bank for privatization: 1. Financial Sector Reform: (The military government, established after the coup on 7th November 1975 under the leadership of Gen. Ziaur Rahman, opted for a much greater role for the private sector. The industrial policy was revised in order to increase the boundaries of private investment while cutting the size of public enterprises. After Zia was killed in 1981, Gen. Ershad (Chief of Army) came into power and he also encouraged the private sector in a similar manner. During this time, the government denationalized a number of banks and industrial units.) ***(PRIVATISATION IN BANGLADESH: A CASE OF PLACING THE CART BEFORE THE HORSE A.K.M. Masudul Haque ) (In the early 1980s, the Government began to reform the financial sector. Interest rates on deposits were raised to provide a positive real

return on deposits, private banks were allowed to enter, two NCBs were denationalized (Uttara and Pubali) and another nationalized bank was converted into a limited liability company and partially privatized. )( Privatization of Nationalized Commercial Banks in Bangladesh)

2. Bad Loans: One of the reasons for privatizing Uttara Bank was that it was suffering from plenty of bad loans or debts. Bad debt is the portion of receivables that can no longer be collected, typically from accounts receivable or loans. (Until the early 1980s, the Government owned, controlled and directed Bangladeshs financial system with the objective of allocating funds to priority sectors. Loan recovery was not emphasized because loans were collateralized and considered ultimately collectable. The quality of financial intermediation, judged by loan recovery rates, was dismal.)***( Privatization of Nationalized Commercial Banks in Bangladesh) Uttara Bank was privatized with the goal that it will no longer have to bear the funding of governments priority sectors like agriculture and other such areas, which eventually created a major portion of the bad loans. To minimize its losses, monitoring and collection of loans seemed necessary to be streamlined which was apparently possible under the hands of a privatized management.

3. Others: (The primary objective of privatization was to streamline and improve the operative efficiency of management of the remaining public enterprises and to reactivate and invigorate the private sector.) (UTTARA) Initially, as a nationalized bank, Uttara Banks principal objectives were to mobilize national savings and finance industries, agriculture and other productive undertakings. But after privatization, its objectives focused more towards profit earning than for socioeconomic development of the country. Before privatization Uttara Bank received complaints about lack of transparency within the management. Internal information about the management decisions was not disclosed to public. Therefore, nepotism and preferential treatment was a common practice when it came to sanctioning loans. Customer satisfaction was not much of a

priority because employees were not motivated or reinforced to focus on the benefit of the customer and nothing particularly depended on the bank-customer relationship. Demanding bribe for releasing a file was a frequent problem. To improve the scenario the government decided to privatize this bank.(UTTARA)

6.3. Development of Uttara Bank Limited after privatization: 1. Profit: Profitability is a very important concern for all banks because satisfactory profits preserve the banks capital, providing it with a base for future survival and growth. The change in profit of Uttara Bank before and after privatization is quite significant which is shown by the return on assets in various years. Margins at NCBs have been consistently lower than at private banks, and furthermore, have been declining since 1989. These differences are due to their non-commercial approach to pricing loans, exacerbated by direct credit to jute and other sectors, their higher share of non-earning assets and their lower fee income. Private banks are charging higher lending rates and more fee income, so that they can afford to pay slightly higher interest rates and still earn higher gross profit margins.(report bd) After privatization the bank also looked for other ways to generate more profit. As it was no more under the government, it stopped giving free of charge services, such as taking bills on behalf of PDB, T&T, etc. Instead the bank put a percentage of charge for this kind of services thus creating a new sector for earning revenue.

2. Foreign exchange business: Initially Uttara Bank did not have much impressive record on earning from its foreign exchange businesses. From the graph it can be seen that immediately after the privatization the growth rate of foreign exchange business of the bank started showing some positive signs. This drive was mainly initiated by an increasing inflow of remittances earned.

Currently the bank has correspondent relationships with 300 foreign banks/bank offices and exchange houses in 72 countries. With the objective of attracting the Bangladeshi wage earners abroad and the non-resident foreigners to invest in Bangladesh, the bank offered them the opportunity to open non-resident foreign currency deposit accounts and foreign currency current deposit accounts with it. Further, the bank floated Wage Earners' Development Bond and established Wage Earners Investment Cell. The bank has some other schemes to induce the wage earners to invest their savings in the securities market of the country. 3. Management efficiency: Privatization had quite a good impact on the management of Uttara Bank. As it has already been noted that improving the quality of management is one of the top priorities of privatization, Uttara Bank also focused first on the management. To start with the bank tried to get out of the usual habit of delaying decisions or works. Presently, regarding any important decisions quick meetings are called and prompt actions are taken as and when required. The management also enforced employee motivation. Before privatization employees were indifferent towards the performance of the bank. But now employees fear losing their jobs if any such attitude is shown. Employees are set individual goals that must be finished in due time. In order to do that employees sometimes work overtime, which is a rare scenario in NCBs. On the other hand, employees are

also encouraged or positively reinforced when they help achieving the banks strategic goals. All these also increase customer satisfaction and help to build a better customer-bank relationship. To further enhance customer satisfaction, Uttara Bank has introduced a complain cell where customers can express their grievances without any hesitation. If any serious complain arise immediate investigation is carried out in order to resolve the problem. According to the employees, Uttara Bank has seen its best management during the period 1997 to 2001 when the main changes took place. Before privatization, Uttara Bank experienced a very slow growth rate in profit earning. After privatization some initiatives were taken to fulfill the new objective. It was in 1997 when the Managing Director M. Aminuzzaman took charge and brought about many significant changes in the bank. Under his regime, the bank changed from its conservative mode to risk taking mode of operating business. During this time it dramatically increased its profit from Tk. 5 to 7 crores to an astonishing Tk. 160 crore. It was at this time when Uttara Bank could touch the milestone of being the second best performer among the commercial banks of Bangladesh. 4. Renovation: Currently Uttara Bank has 198 branches operating throughout the country. During the period 1997 to 2001, the banks then MD M. Aminuzzaman took an initiative to computerize all the branches which increased the efficiency and greatly reduced the operating cost of the bank. At present the day to day operations of the bank are carried out using its own software. Moreover to provide faster and better service in foreign exchange business the main branch maintains 11 email accounts and 62 of its branches are enjoying internet facilities. To satisfy customers further service related queries, Uttora Bank Ltd has opened its own website with the address: www.uttarabank-bd.com. Presently Uttara Bank Ltd has 26 of its branches are using the Society for Worldwide Interbank Financial Telecommunication ("SWIFT") network. Linking the bank with this system enables it to exchange messages securely and reliably between banks and other financial institutions throughout the world at a relatively low cost.(annual report 2005) Also, to facilitate its business, the bank has recently moved its head office to the newly constructed Uttara Bank Bhaban at the heart of Motijheel and at the same time is renovating the old branches.

Statistical pre & post growth rate analysis: The growth in deposit, advance and total income of Uttara Bank from the year 1978 to 1986 are shown in the graphs below: From the graphs it can be seen that in case of all three accounts, there is a decreasing trend till or around 1983 when the bank was privatized in order to improve these situations. After 1983, deposit, advance and total income growth rate all showed increasing trend, clearly showing the effects of privatization. However it can also be noticed that during this period income had its highest growth (52%) in 1981.

6.4. Problems persisting from the pre-privatization period:

1. Lack of competitiveness: Compared to the number of banks in our country, the number of loan takers is still quite few and not rapidly growing. This is because entrepreneurship is still at a premature state in here. So the banks have to compete amongst themselves for this small customer base. The aggressive banks in this system therefore are able to take the advantages by going for even the risky loans. Thus there were more chances for these banks to make profits. But conventionally, NCBs are not much of a risk taker. These banks approach for safe banking and ultimately are unable to compete with the private banks in generating much profit. Uttara Bank, though now privatized, could not get out of this same trend. It can be seen that for a certain period of time, as mentioned before, Uttara Bank was able to get out of this defensive position & approached aggressive banking under an efficient management. But soon after the management was changed the bank went back to its conservative stance. Just a few years after achieving the place of the 2nd best performer among commercial banks, in 2003 Uttara was marked as a problem bank by Bangladesh Bank. This proves that Uttara Bank is still unable to maintain a consistent and efficient management system and is reluctant to take risks and increase competitiveness.

2. Classified loans: One of the main reasons for privatizing Uttara Bank was to reduce its bad debts. But unfortunately the bank failed to fulfill this objective effectively. As it can be seen from the data given later, the bank still has a very high proportion of classified loans compared to other private banks. Regarding this, the management of the bank explained that the classified loans before and soon after privatization accumulated to such a huge amount that the bank is still unable to improve the situation. The bank even had to write off the bad debts several times until now but having no apparent success.

3. Recruitment process: The recruitment process of Uttara Bank still follows the same traditional process. The process is not always fair and there is always some partiality or preference for the candidates who are able to apply through high officials.

The authority is not even much interested in updating the recruitment process.

4. Labor union: Labor unions and CBAs, most of which are affiliated with political parties, are quite common in state owned enterprises and thus NCBs. Uttara Bank was no different in this case and even after privatization the bank faces some problems, such as strikes or lockouts, of the existing labor union. The problem is when the bank was privatized it was handed over to the new owner along with all its belongings, including the unions. Currently the authority sees no possible step that can be taken to completely get rid of the troubles that might be caused the unions. It can merely negotiate with the CBA and avoid any difficulties from arising.

4. Others: Though many years have passed since its privatization, Uttara Bank did not appear to have improved much regarding the overall working environment. An on spot observation of the physical environment of the banks head office gave the impression more of a nationalized bank than a private one. The management claims that all the branches are computerized but it was found that most of the works are still done manually first and updated in modern database later. Even the high officials were not found to use computers for their own work. The employees were also unsatisfied on the level of renovation carried out in the bank after privatization. The authority does not emphasize much on the outlook of the bank, which however is quite regarded as an important part of attracting customers by private banks. Any customer visiting the bank will not have a very good first impression, which on the contrary can be found easily in most other private banks. The employees also complained about the absence of a welfare committee where they could inform about their grievances regarding the working environment.

Chapter 7: Comparison between a privatized and a nationalized bank: Uttara vs Janata 7.1. Problems generally faced by NCBs: In the pre-liberalization period, Bangladesh shared many characteristics of a financial repressed economy. They are, rigidly administered interest rates, high and inflexible reserve and liquid asset requirements, direct credit ceilings, lack of close control on the large refinance programs, relaxation of lending criteria for special groups, etc. Banks have been prevented from exercising their appropriate role in risk management, loan pricing, credit allocation and in loan recovery. Until the early 1980s, the financial system was controlled and directed by the government with the objective of allocating funds in the directions and for the purposes the government established. This was done with the help of nationalized banks. From independence right up to the early 1980s, all the banks in Bangladesh were nationalized. The nationalized banks faced serious solvency problems because they have been directed to lend to public sector enterprises that are unable or unwilling to repay their loans. Allocation of loans was guided by non-economic factors and political considerations rather than sound economic considerations. Since there was no competition from private banks and private direct financial markets, the nationalized banks lacked the initiative to become efficient. High default rates have prevented the formal financial institutions from becoming self-financing despite large government injections of money. The banking system concentrated on deposit collection which provided the cash flow which in turn enabled the system to operate with the low loan recovery rates. Proliferation of specialized financial institutions like the agricultural bank, industrial bank, led to serious fragmentation and segmentation of the credit market. Specialized institutions attracted foreign resources effectively, but failed completely to mobilize domestic resources and had a mixed record in allocating funds to productive investments. The government used inappropriate regulations to control the financial sector. Interest rates were set by decree and did not reflect the underlying market forces. A very limited choice of financial instruments was available to savers which made it difficult for monetary authorities to conduct any meaningful monetary policy. The most commonly used instrument of monetary policy in developed countries, namely open market operations had very little relevance for the lack of a well developed financial market. 7.2. Background and history of Janata Bank: Janata Bank Limited, the second largest commercial bank in Bangladesh, has an authorized capital of Tk. 800 crore (approx. US$ 115.99 million), paid up capital of Tk. 259.39 crore (approx. US$ 37.61 million) and reserve of Tk.172.65 crore (approx. US$ 25.03 million). The Bank has a total asset of Tk. 21266.39 crore (approx. US$ 3083.4 million) as on 31 st December 2006. Immediately after the emergence of Bangladesh in 1971, the erstwhile United Bank Limited and Union Bank Limited were nationalized and renamed as Janata Bank Limited.

Janata Bank Limited operates through 848 branches including 4 overseas branches at United Arab Emirates. It is linked with 1198 foreign correspondents all over the world. The Bank employs more than 13(Thirteen) thousand persons. The mission of the bank is to actively participate in the socio- economic development of the nation by operating a commercially sound banking organization, providing credit to viable borrowers, efficiently delivered and competitively priced, simultaneously protecting depositors funds and providing a satisfactory return on equity to the owners. The Board of Directors is composed of 7 (seven) members headed by a Chairman. The Directors are representatives from both public and private sectors. The Bank is headed by the Managing Director (Chief Executive), who is a reputed banker. The corporate head office is located at Dhaka. 7.3. Comparison of performance between Uttara and Janata: In this section we will compare the privatized Uttara Bank Limited with the nationalized Janata Bank to find out whether Uttara Bank could break out of the problems of the nationalized status and achieve the primary objectives of privatization. The comparison will be based on the data obtained from the period 1996 to 2005. At first the profit earning power of the banks are compared using the return on asset ratios of both the banks.

The graph shows that until 1999 Uttara Bank was having a lower ROA ratio than that of Janata Bank. After 1999, under a new management, Uttara Bank started using their assets efficiently thus causing a sudden boom in the ratio. This rapid increase in trend continued till 2001, after which it again fell drastically and have a fluctuating and slow growth trend ever since. The ratio of Janata Bank however remained well below 0.20% till 2004 but experienced a sudden rise in 2005.

Next we have deposit growth which is a factor that lets bank keep growing.

In this case no striking difference is seen between the two banks. Both the banks show a very fluctuating trend in the growth of deposit volume, which is following the industrial pattern. Though Uttara Bank, as a privatized bank, was expected to show a much higher percentage of deposit growth than Janata, no such difference was found. Uttara showed a higher mark than Janata in the years 99, 02 and 03. But rest of the time it kept pace along with or sometimes even lower than Janata Bank. This shows that privatization could not help Uttara to grow strongly or gain further customer trust. The advance growths of the two banks are shown from the year 2001 to 2005.

This figure further goes against privatization. It shows that during the period 2001 to 2005 the percentage growth in the amount of advance of Janata Bank is way above that of Uttara Bank. Both banks showed a decreasing trend until 2003, after which they again started rising. Classified loan is a loan that is not being repaid on time and so is criticized by bank examiners as being substandard after being approved. Under the regulatory system of Bangladesh Bank, classified loans consist of three types of loans- sub standard, doubtful and bad debts.

As mentioned before, one of the primary objectives of privatizing Uttara Bank was to reduce the amount of classified loans. The graph shows though Uttara Bank was able to decrease the proportion of classified loans, its pattern is almost the same as Janata Bank. It showed no drastic change or improvements as expected from privatization.

7.4. Camel rating: a global approach of evaluating bank performance: Central bank, the regulatory authority of the banking sector of Bangladesh, is responsible for monitoring the financial conditions of commercial banks and enforcing related legislation and regulatory policy. The banking sector in Bangladesh comprises of four categories of scheduled banks. These are, nationalized commercial banks (NCBs), government owned development finance institutions (DFIs), private commercial banks (PCBs) and foreign commercial banks (FCBs). As of December 2004, total number of banks operating in Bangladesh remained unchanged at 48. These banks have a total number of 6,303 branches including 10 overseas branches. The overall performance of every bank is analyzed and evaluated according to the five crucial dimensions of banking operations. These criteria are Capital adequacy, Asset quality, Management efficiency, Earning capacity and Liquidity (CAMEL). Analyzing the overall operational activities of all commercial and specialized banks; Bangladesh Bank has ranked 14 A-class or Strong, 11 B-class or Satisfactory, 11 C-class or Fair, 9 D-class or Marginal and 3 E-class or Unsatisfactory banks by the end of 2005. A-Class banks: The 14 A-class banks are Prime Bank, Mutual Trust Bank, Dutch-Bangla Bank, Bank Asia, Exim Bank, Mercantile Bank, Jamuna Bank, Dhaka Bank, BASIC Bank, Standard Bank, Commercial Bank of Ceylon, Citibank N.A, State Bank of India and HSBC. B-Class banks: The B-class banks are Eastern Bank, Premier Bank, The Trust Bank, BRAC Bank, Southeast Bank, NCC Bank, One Bank, Standard Chartered Bank, Woori Bank, Bank Alfalah and National Bank of Pakistan. C-Class banks: Islami Bank Bangladesh Limited, Pubali Bank, Uttara Bank, National Bank, The City Bank, UCBL, Shahjalal Islami Bank, Al-Arafah Islami Bank, IFIC Bank, AB Bank, First Security Bank and Habib Bank. D-Class banks: The D-class banks are Social Investment Bank, Bangladesh Commerce Bank, Agrani Bank, Janata Bank, Rupali Bank, Sonali Bank, BSRS and RAKUB. E-Class banks: Bangladesh Krishi Bank, Bangladesh Shilpa Bank and The Oriental Bank. It is revealed by the analysis that the top ranking banks were able to bring best results managing credit and asset efficiently. The ratings indicate that financial performance of the PCBs and FCBs in general has been better than that of the industry average. However, 4 of the PCBs rated CAMEL 4 or 5 are still in the problem bank list out of 7 put in this category in the mid-nineties. Activities of the problem banks are closely monitored by the central bank with special guidance and care. At present 6 banks are in the problem bank list. The rating also shows that all the four NCBs had Marginal or Unsatisfactory rating. The NCBs are experiencing huge capital and provision shortfall, having large amount of classified loans, low earnings and ineffective management. ***( Banking Sector: CAMEL Rating 2005 By Khorshed Khokon Banking Sector Performance, Regulation and Bank Supervision)