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Central Banking And Monetary Policy
Course Code: Fin-2132
Submitted To:
Nargis Parvin
Lecturer, Dept. of Business studies,
Southeast University.

Submitted by:

Name: ID:

Md. Monwar azam 2007110000020

Papia Sakawat 2007110000036

Batch - 16(A)
Program - BBA

Southeast University
March 08, 2009

Nargis Parvin
Lecturer, School of Business Studies
Southeast University

Subject: Submission of the Assignment

Dear Madam,
We would like to submit the assignment which is to done on the
“Opportunity and Threats of E-Banking in Bangladesh”. The assignment
making has given us the opportunity to know about the E-Banking
situation in Bangladesh.

Your valuable advice, suggestion and guidance have helped us to prepare

the assignment with care. We will be very glad, if you kindly accept this

Sincerely your’s
Md. Monwar Azam 2007110000020
Papia Sakawat 2007110000036

Firstly I would like to give thanks Almighty Allah for successfully complete the
assignment. Secondly thanks to our course instructor “Nargis Parvin”, who has
provided us suggestions to pursue the assignment. I also give thanks to the
librarian of Southeast University for his help.

Finally, I would like to thank my friends and respected personnel for providing
me banking information.
The advent of E-Business accompanied with technological innovations and
globalization is constantly propelling the businesses organization to redefine
their business operations in terms of value chain reengineering and restructuring
business models. Likely, the financial sector is metamorphosing under the
impact of competitive, regulatory and technological forces. Financial
institutions especially the banking sector is currently in a transition phase. The
banks have put themselves in the World Wide Web to take advantage of the
internet’s power and reach, to cope with the accelerating pace of change of
business environment. The famous quote by Bill Gates that banking is vital to a
healthy economy, but banks themselves are not highlights the crucial nature of
the electronic forces that are affecting banks more than any other financial
service provider group. This transition of business operations by banks have
crated new mode of operation called E-Banking.

The term Internet Banking or E-Banking Internet both are used as supplement.
E-Banking is the one of the major part of E-Financing. Hertzum et al. defined
E-Banking as web-based Banking. In other words E-Banking refers to the
banking operations, which is done over World Wide Web. However, more
comprehensive and well-established definition is given by the United Nations
Conference on Trade and Development (UNCTAD). This definition covers
almost all area of E-Banking.
Internet banking refers to the deployment over the Internet of retail and
wholesale banking services. It involves individual and corporate clients, and
includes bank transfers, payments and settlements, documentary collections and
credits, corporate and household lending, card business and some others.

E-Banking information architecture is modeled as client-server architecture. A

client operating through a PC linked to Internet opens the special E-Banking
site of his bank and then, using a set of special secure numbers, gets access to
his bank accounts and has the opportunity to consult them, as well as to make
all necessary payments and transfers form his personal accounts.
When the transaction number is exhausted the bank sends him a new set of
numbers for his individual transfer sessions. In some cases the bank provides
customized software.

The bank software program can also be utilized offline, for example for
preparing the payment orders offline and then making the actual order online.
The client receives all numbers separately, mainly by mail. The bank also
provide clients with similar facilities in its premises so that clients can use the
bank equipment such as an ATM or a special facility linked to the main terminal
facility called Multimat, permitting them to effect the same account
examination, payment and transfer operations without consulting the bank staff.

Types of E-banking:
The terms ‘PC banking’, ‘online banking’, ‘Internet banking’, ‘Telephone
banking’ or ‘mobile banking’ refer to a number of ways in which customers can
access their banks without having to be physically present at the bank branch.
E-banking may be understood as term that covers all these ways of banking
business electronically.

Tele-banking service is provided by phone. To access an account it is required
to dial a particular telephone number and there are several options of services.
Options included
__Checking account balance
__Funds transfer between current, savings and credit card accounts
__Bill payments
__Stock exchange transaction
__Receive statement via fax
__Loan payment information

PC Banking
The increasing awareness of the importance of literacy of computer has resulted
in increasing use of personal computers through the entire world. Furthermore,
incredible plummet of cost of microprocessor has accelerated the use of
computer.The term ‘PC banking’ is used for banking business transacted from a
customer’s PC. Using the PC banking or home banking now customers can use
their personal computers at home or at their office to access their accounts for
transactions by subscribing to and dialing into the banks’ Intranet proprietary
software system using password.

Internet Banking
Internet banking would free both bankers and customers of the need for
proprietary software to carry on with their online banking transactions.
Customer behavior is changing rapidly. Now the financial service is
characterized by individuality, independence of time and place and flexibility.
These facts represent huge challenges for the financial service providers. So the
Internet is now considered to be a ‘strategic weapon’ for them to satisfy the
ever-changing customers’ demand and innovative business needs.

Mobile Banking
Actually mobile banking is a variation of Internet banking. Mobile banking is a
good example of how the lines between the various forms of e-banking are
becoming gradually blurred. Due to the new transmission technologies such as
WAP (Wireless Application Protocol), portable terminal like mobile phones,
personal digital assistant (PDA) or small hand-held PCs are providing bank
customers with access to the Internet and thus paving the way to Internet
banking. It assures immense flexibility and makes the financial services
independent of time and place. However, the use of mobile banking is still in a
nascent state. The slower transmission speed of the WAP standard and the
limited amount of information available are just two of the factors inhibiting the
use of those terminals.

Opportunity of E-Banking in Bangladesh:

The infrastructure covers the major cost of any electronic banking system. But
it’s a matter of huge investment for a country like Bangladesh. But fortunately
Bangladesh Railway has a high-speed optical fiber network parallel to the
railway path owned by Bangladesh Railway which has a total capacity of about
2.5 Gbps. This fiber optic network covers almost every important parts of the
country. So, it is an opportunity to use it as the backbone network of electronic
banking in Bangladesh. Some of the multinational companies like Grameen
mobile phone company, Ranks ITT of Bangladesh have already started to use
this high-speed optical fiber network and they are providing their services even
in rural area. So we can utilize this opportunity in case of E-banking in

In Bangladesh there is a large gap between the computerization of foreign banks

and that of local commercial banks (the gap is particularly great in respect of
local public commercial banks) and as regards the state of their intra- and inter-
branch online networks. However, 75 per cent of local banks are planning to
introduce E-Banking, which implies very dynamic improvements in their ICT
use indicators. Virtually all banks use banking software at their head offices and
during the past few years around one third of local banks has become SWIFT
members. Credit card and point of sale services (POS) are already provided by
a quarter of local banks, while ATM and internet banking are expanding rapidly
especially in major cities.
Proposed ICT infrastructure for E-banking in Bangladesh:


Port Authority
Bank X
BO 1
Central Bank HO

Bank Y Bank Z

Router/FW Router/FW Router/FW Router/FW

Optical Fiber Nation-wide Banking Network

Sub Marine Cable

Router/FW Router/FW Router/FW Router/FW

Principle Branch

Bank Z Bank Y Bank X

Central Bank/
Sonali Bank
BO BO N Othe
HO- Head Office
BO- Branch Office
Description of Proposed ICT infrastructure

In the above configuration all bocks are symmetric except for the role of central
bank differs slightly.
► In central zone (i.e. Dhaka) Bangladesh Bank (Head Office) is connected
with every other Head Office and branch office is connected to its head office in
the same region. Bangladesh Bank(Head office) is given the legal authority to
get any sort of information regarding the transaction flow from any bank.

► In the regions other than Dhaka the role of Bangladesh Bank is handed over
to ‘Sonali Bank’ Principal Branch if there exists no branch of the central bank.

► In both regions each bank forms a local network (might be wired or through
radiolink) where the head office or principal branch play the central role.

► In some relatively remote area (Rangamatee) where total number of

branches of all banks is very few (for instance a total of 5 branches are there)
the above configuration is not a feasible one. In such cases, all branches,
irrespective of banks, should form a local network. This is because
establishment and maintenance cost will be much higher for a number of very
small LAN instead of a single moderately sized one. Unlike other unit it has no
governing entity. Here every branch communicates directly with its Head
Every Head Office is having its own VSAT to be connected with the Internet.
One is shown in the diagram. Alternatively, Internet connection can be assured
by direct connection with the sub-marine cable as a future solution. It is shown
as the dashed box in the diagram. In the diagram of the proposed infrastructure
the magnified box shows a special module entitled ‘others’ connected with the
head office. It is used to represent to facilitate for the utility bill payments such
as water, gas etc. As a result, customer will be able to pay their utility bills at
any branch of any bank. It would obviously reduce the immense pressure on
some specific branches as being followed now. Again, it presents some non-
banking financial service providers such as insurance company.

According to the “E-Commerce beyond 2000”, the banking and finance sector
has been a rapid adopter of E-Commerce because its products could easily be
virtualized and the product had priority over place banks can generate revenue
through increased account access fees, and benefit from promotional
opportunity to cross-sell products such as credit cards and loans.

The advances in Internet security and the advent of relevant protocols has put
banks in perspective again as financial intermediaries and facilitators of
complete commercial transactions via electronic networks and especially via the

Consumers are increasingly looking for services they can access from a single
entry point. Awareness of competition has motivated banks to move
aggressively in seeking alliances and establishing joint ventures to maintain
their claim to this part of the E-banking infrastructure. Like there are alliances
in the ATM network, Group Network, Money Transfer Network etc. This is also
creating segmentation of networks where the customers of this networks
sometimes unable to access to others’ network. Consumer behavior in banking
changed partly as a result of changes in the amount of spare time available to
individuals. Mobility, independence of time and place, and flexibility has
become key words in consumer banking.

The Internet banks serve also as gateways offering identification and

authorization services to a number of third party service providers. There are
user-friendly opportunities for conducting business over the Internet with
telephone companies, Energy Company, tax board and other institutions.
Demand for those services influences also the usage rates of Internet banks.

Operational risk
Operational risks arises from the fact of some external events , processes,
systems, people etc. in the execution phase error occurred due to internal failure
of processes, systems etc. external event causes serious operational risk due to
natural disaster. It sometimes arises from the part of customers such as misuse
of system and inadequately designed and implemented electronic business

Security risks
Operational risk arises with respect to the controls over access to a bank’s
critical accounting and risk management systems, information that it
communicates with other parties and, in the case of electronic money, measures
the bank uses to deter and detect counterfeiting. Controlling access to bank
systems has become increasingly complex due to expanded computer
capabilities, geographical dispersal of access points, and the use of
various communication paths, including public networks such as the Internet. It
is worth noting that with electronic financial transaction, a breach of security
could result in fraudulently created liabilities of the bank. For other forms of
electronic banking, unauthorized access could lead to direct losses, added
liabilities to customers or other problems. A variety of specific access and
authentication problems could occur. For example, successful attack by hackers
via Internet he/she can cause severe danger by accessing confidential customer
information. Some of the threat may occur like Replay attack Besides the
external attack, an e-banking site must be well equipped to deal with some
internal bad practice like employee fraud: employees could surreptitiously
acquire confidential information of the customer for some evil aspects.

System design, implementation and maintenance

A bank faces the risk that the systems it chooses are not well designed or
implemented. For example, a bank is exposed to the risk of an interruption or
slow-down of its existing systems if the electronic banking system it chooses is
not compatible with user requirements. The rapid pace of change that
characterizes information technology presents banks with the risk of systems
obsolescence. Furthermore, rapid technological change can mean that staff may
fail to utilize the power of newly adapted technology for e-banking.
Customer misuse of products and services
As with traditional banking services, customer misuse, both intentional and
inadvertent, is another source of operational risk. In the case of e-banking this
sort of risk is predominating if a bank does not adequately educate its customers
about security precautions such as authentication information, credit card
number etc. Subsequently, the bank may incur financial losses because of
transactions customers did not authorize.

Strategic risk from management perspective

Financial institution’s board and management should understand e-banking
risks and evaluate the risk and cost to minimize associate risks prior to offer e-
banking service. Strategic risks result from (bad) business decisions taken by
management. Specifically, the danger of not being able to keep up with rival
technologies is the source of the greatest strategic risk. Technology is so
important for e-banking operations that there is a correspondingly great needs to
invest in new technologies. Innovators assume most of the risk. It is often
impossible to foresee whether a new product will survive on the market or
whether a project can be successfully brought to conclusion. Failed IT projects
can raise the amount of misallocated investment; thus, instead of reducing costs,
e banking would have precisely the opposite effect. Therefore, some institutions
are pursuing the strategy of imitation. Such banks not only save costs on IT
development but also have the advantage of knowing that a technology has
proved to be feasible and that the market has shown initial signs of acceptance.
A major disadvantage of this strategy is that if circumstances cause the
technology to be entered into production too late, the market segment could
already be occupied. The rapid pace of innovation in e-business is requiring
banks to make e-banking strategy decisions as quickly as possible, since
technological innovation and customers’ tastes may radically change.
Frequently there is no way to predict which technology and which terminals
(e.g. mobile phones, television set, PDAs ) will prevail. Missteps in the
planning and implementation of strategy engender considerable risks. The
responsibility for these decision lies with the senior management of the bank.

Reputational risk
Banking business is especially sensitive to fluctuations in confidence.Therefore,
reputational risk, particularly in a relatively new field of business, represents a
special challenge for banks. Customers’ confidence in their bank can be shaken
if the bank is not able to provide secure and trouble-free e-banking services.
The same is true if services such as responding to inquiries or processing orders
are not performed at the speed that customers have come to expect in the
‘electronic age’.
Other risks
Traditional banking risks such as credit risk, liquidity risk and market risk are
alsopresent in e-banking sectors.

Credit risk
It is the risk that counter-party will not settle an obligation for full value, either
when due or at any time thereafter. Banks engaging in e-banking activities may
extend credit via non-traditional channels, and expand their market beyond
traditional geographic boundaries. Inadequate procedures could heighten credit
risk for banks. Banks engaged in electronic bill payment programs may face
credit risk if a third party intermediary fails to carry out its obligations with
respect to payment.
Liquidity risk
It arises from a bank’s inability to meet its obligations when they come due,
without incurring unacceptable losses, although the bank may ultimately be able
to meet its obligations. Liquidity risk may be significant for banks that
specialize in electronic money activities if they are unable to ensure that funds
are adequate to cover redemption and settlement demands at any particular
time. In addition, failure to meet redemption demands in a timely manner could
result in legal action against the institution, and lead to reputational damage.

Market risk
Market risk is the bank of losses in on and off balance sheet positions arising
from movements in market prices, including foreign exchange rates. Banks
accepting foreign currencies in payment for electronic money are subject to this
type of risk.
Web based banking service or E-Banking, the latest generation of electronic
banking transactions, has opened up new window of opportunity to the existing
banks and financial institutions. It permits business process re-engineering,
serving borderless market, to achieve zero latency leading to improvements in
customer service levels and better risk management because of real-time
settlement. Since its evolution in 90th decade, it is having unprecedented
growth. The growth rate is higher in Developed Countries, and comparatively
lower in LDCs countries like Bangladesh. The E-Banking sector is highly
prohibitive for the new entrants although the inception cost is lower with high
growth rate. The brand preference of the customer, existing network, physical
existence, security and safety, supplier bargaining power, substitute product of
non-banking sectors have made the way thorny. However, new comer with
innovative idea and strategy definitely can make position in this sector. The
analysis of the evolution and present status of E-Banking make us some room to
make commandments for the government, new entrants and existing e-banks for
effective utilization of the opportunity to accelerate the economic growth.