Term Paper

On
Inclusive development in financial sector of Bangladesh: after
1971 to present

Course Name: Banking law and practice

Course Code: FB-209.

Submitted To :
Bijoy Chandra Das
Lecturer
Finance & Banking Department
Jatiya Kabi Kazi Nazrul Islam University

Submitted By:-
Harun-Or-Rashid
On behalf of group -4
Roll: (14132636 – 14132648)
Session: - 2013-14
Dept.: - Finance & Banking.
2nd year 2nd semester

Submission Date: 20/01/2016

1
Data: 20/01/2016

To
Bijoy Chandra Das
Lecturer, Department of Finance & Banking

Sub: Submission of the term paper

Sir,
With due respect, we would like to inform you that, we are group-4, students of Finance
& Banking department. It is our great pleasure to inform you that we have to opportunity
to submit a term paper on “Inclusive development in financial sector of Bangladesh: after
1971 to present” as a requirement for course named Banking law and practice, course no:
FB-209.

We therefore pray and hope that you would be kind enough to us with accepting this term
paper and bless us heartily.

Yours obediently,

Harun-Or-Rashid
On behalf of group 4
Department of Finance And Banking, 5th Batch.
2nd year 2nd semester
2013-14 season.

2
 Profile Of Members
Name Roll Number

Harun-Or-Rashid 14132638

Fatema Akter 14132636

Rumjhum Borsha Mree 14132637

Afroza Akter Sumi 14132640

Jewel Rana 14132641

Roni Mia 14132642
Iqbal Hossain 14132643

Masum Rana 14132646

Noor Nabi Islam 14132647

Saiful Islam 14132648

Table of Contents

3
S.L topics Pages
1. Introduction 5
2. Objectives of the report 6
3. Methodology of the Study 6-7
4. Literature analysis 7
5. Theoretical analysis 8

6. History of Banking In Bangladesh 8-9

7. Legal fame work of Bangladesh bank 10
8. Stability of financial & payment system 10-14

9. Financial system of Bangladesh 14-16

10. The financial market in Bangladesh is mainly of following types: 16-20
Money Market
Capital market
Foreign Exchange Market
11. Proposed Financial System for Bangladesh
12. Overview of Bank and Fis 20-21

13. Product and Services 21-22

14. Electronic Banking system in Bangladesh 25
15. Different forms of electronic banking 25-28
16. Developments in Financial Sector of Bangladesh 29

17. Potentials and problems of banking business in Bangladesh 29-30

18. Bank participation in economic development 30-31

19. Future Prospect of Banking Business In Bangladesh 32-34

20. Conclusion/ Recommendation of our analysis 34

21. References 34

22. Appendix

Introduction

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After independence in 1971, Bangladesh turned into a case of survival. Western
economists viewed the country as a test case of development. Many found its separation
from Pakistan as imprudent, and many expected to see the country slide into the crowd of
the failed states for years to come. But Bangladesh emerged from the ashes and disproved
all the myths and dismal predictions. Now the country is known as a role model of
sustained growth and inclusive development, justifying the dreams of the Father of the
Nation Bangabandhu Sheikh Mujibur Rahman and the sacrifices of the millions. The
nation also justifies the support of our wartime allies including India in particular – the
neighbouring country whose resolute stance in 1971 in favour of Bangladesh’s freedom
was the strongest strategic support for an embattled nation like us in the international
arena.

The initial years of a war-ravaged Bangladesh was bumpy and stressful as expected.
After 1975, the country entered a period of policy anomalies that contributed to enormous
macroeconomic fluctuations until the early 1990s. By that time, both China and India had
embarked on liberalisation and we were not too late to catch the train. Privatisation and
pro-market reforms in the early 1990s placed Bangladesh into a new trajectory of
economic dynamism, which got a new boost since the mid-1990s. This new era of
liberalisation and gradual inception of market reforms fuelled the Bangladesh economy to
accelerate and we followed a new path of higher growth momentum.

Attaining high economic growth without an inclusion strategy is not possible for an
emerging economy like Bangladesh. Herein, lies the essence of financial inclusion that is
instrumental to formulating monetary policy by Bangladesh Bank. The main objective of
financial inclusion is to ensure access to finance for all segments of people in the society,
and therefore to make growth sustainable by engaging the poor.

Bangladesh Bank believes that financial inclusion not only stimulates growth by
expanding the activity base, but also contributes to growth stability through desired
diversification of financial assets.

Objectives of the report

The main objective of preparing this report is to analyze

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Broad Objective
 As a part of the B.B.A program.
 To enlarge our experience from a real corporate exposure.
 To match our academic knowledge with the real business set up.

Specific Objectives

 To know the banking history, banking structure, legal fame work etc.
 Different policies practiced by banking system of Bangladesh.
 Banking effect in Bangladesh economy.
 Rules and regulations in banking system from the beginning to today.
 To know financial condition, problems and its solution
 To accomplish the course

Methodology of the Study

The data needed for conducting the study has been collected from the primary source as
well as secondary source. In collecting the necessary data, care has been taken so that all
the variable that in some way can not affect the objectives of the study. The information
that we used in this study is collected by the following way:

Primary Data Source:

 Different banking websites
 Employee`s opinion collected through question.
 Observation of banking activities.

Secondary Data Source:

 Annual report of the bank.
 Bangladesh Bank report.
 Files, balance sheet and various documents of different bank
 Any information regarding the banking sector.

Literature analysis

Bangladesh is a third world country with an under developed banking system,

particularly in terms of the services and customer care provided by the government run

6
banks. Recently the private banks are trying to imitate the banking structure of the more
developed countries, but this attempt is often foiled by inexpert or politically motivated
government policies executed by the central bank of Bangladesh, Bangladesh Bank. The
outcome is a banking system.

The formally known ‘State Bank of Pakistan’ was renamed as ‘Bangladesh Bank’ right
after Bangladesh’s independence. The Bangladesh Bank automatically became official
foreign exchange reserve institute. It was too accountable for currency control,
monitoring exchange and credit control. In the early 1970s, the government decided to
permit foreign banks to continue their business and nationalize the local banks. In that
very decade of 1970s, the primary concern of the government was to develop the
country’s agricultural industry. This resulted in the Krishi Bank extending loans to more
farmers. In the later decades, however, the county’s focus shifted to industrialization;
resulting in various difficulties in the economic growth. Lack of proper private activity
guidelines and proper methods on loan giving were more significant of these problems. It
was not until the late 1980s that these difficulties were being overcome and compensated
for the agro sector. However the financial institutions failed to recover the loans the
industrial sector. Interestingly, Grameen Bank has set an ideal example of how things
should be managed during this devastating time. The bank gave out small amount of
loans to the poor population in order for themselves to be self-employed. The selection
process for giving out these loans was extraordinary. They gave loans mostly to women
who were subordinated; these women became self-employed and hence paid back when
were helped with guidance to run their business. In the mid ‘1980s, the government
adopted new policies for recovery. It did not work. Government-owned Banks continued
to fail on recovering the loans. In the 1990s, many private banks started to emerge.
Local group of companies became aggressive in investment so the money flow was rather
big.  Bangladesh Bank played key role in managing these private banks with modern
outlook. As consciences the banking sector grew many folds. Throughout the 2000s,
governments maintained positive economic policies. The economy grew, so did the
Bangladesh's banking sector and business sector. Since 2011 however, many banking
scams took place, mainly at government owned banks. This created a bad vibe which is
still to recover from.

Theoretical analysis

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Financial system: Financial system means the way taken by Bangladesh bank to control
the commercial banks and to maintain the economic stability of our country.

Bank: An establishment authorized by a government to accept deposits, pay interest,

clear checks, make loans, act as an intermediary in financial transactions,
and provide other financial services to its customer. In border sense bank is a financial
intermediary who collects money through deferent deposit and provides loans and
advances among the customer and money creator that create money by lending money to
a borrower, thereby creating a corresponding deposit on the bank's balance sheet.
Lending activities can be performed directly by loaning or indirectly through capital
markets.

According to Prof. Cairn cross: “A bank is a financial intermediary, a dealer in loans and
debts”

According to Prof. Chambers: “A bank is an office or institution for the keeping, lending
and exchanging etc of money”

Finally we can say the institution which deals with money by taking deposit and lending
money as loan and work as a money creator is called bank.

Non-bank financial institutions: Non-bank financial institutions are those types of

institute which are regulated under financial institutions Act 1993 and it controlled by the
Bangladesh Bank. Its main objective is to help bank and other institution by rendering
different services.

Product and Service: Products: Bank can provide a safe and convenient way to
accumulate savings and offer services that can help customer to manage their savings are
called bank product.

History of Banking In Bangladesh

In 1947 the government of Pakistan established National Bank of Pakistan by a special

Act of the parliament. The government held 49% share with the remaining 51% going to
the public. At a later stage, on the recommendation of accredit Enquiry committee set up
by the government, the first East Pakistan based bank-Eastern Mercantile Bank Ltd was
created in early sixties. Another East Pakistan bank in the name of Eastern Banking
Corporation was set up a little later. These two banks are forerunners of present day
pubali bank ltd and Uttara Bank Ltd respectively. In the mean time some more banks like
united bank ltd, Australia bank ltd, commerce bank ltd and standard bank ltd were
established in 1960s under the sponsorship of west Pakistani entrepreneurs. With the

8
exception of national bank of Pakistan and the two small sized East Pakistan base banks,
all other banks were set up by non-bengali private entrepreneurs with head quarters in
Pakistan, mostly in karachi. From the lofty heights of their head quarters they ruled the
financial empire of the country.
The leading political leaders in Bangladesh identified banking along with insurance as
powerful instrument of exploitation of the people. It must have shaped their vision which
found expression in the form of nationalization of the banking system immediately after
the liberation of Bangladesh.
In keeping with the principle of socialistic goals the dreams of Bangladesh had set for
themselves, the bank were nationalization at the first available opportunity. The twelve
banks which had been functioning prior to liberation were compressed into six
nationalized banks through a process of amalgamation or mergers.

Banking Structure Of Bangladesh:

The banking system of Bangladesh including foreign commercial banks, private

commercial banks, state owned commercial banks, specialized commercial banks etc.

1 State owned commercial banks. 4

2 Private commercial banks. 30 & 6(proposed)

3 Foreign commercial banks. 9

4 Specialized commercial banks. 5

5 Non residential banks. 3(proposed)

6 Non bank financial institutions. 29

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 Legal fame work of Bangladesh bank

Bangladesh Bank acts as the Central Bank of Bangladesh which was established on
December 16, 1971 through the enactment of Bangladesh Bank Order 1972- President’s
Order No. 127 of 1972 (Amended in 2003). 

The general superintendence and direction of the affairs and business of BB have been
entrusted to a 9 members' Board of Directors which is headed by the Governor who is the
Chief Executive Officer of this institution as well. BB has 45 departments and 10 branch
offices. 
The laws and regulations regarding formation, administration and operation of banks are
spread over several pieces of legislation supplemented by Bangladesh bank’s own
regulation issued by time to time.

Laws and regulations of banking

 Foreign exchange regulation act 1947,
 Bangladesh bank order 1972,
 Banking companies act1991,
 Companies act 1994,
 Bankruptcy act 1997,
 Money laundering act 2002.
The following are some significant aspects of banking and relevant legal provisions:
1. Capital and Reserve.
2. Cash reserve ratio (CRR).
3. Statutory liquidity ratio.
4. Corporate management in Banking.
5. Scheduling of banks.
6. No concentration of shares in few hands.
.
Stability of financial & payment system
Bangladesh Bank declares the monetary policy by issuing Monetary Policy Statement
(MPS) twice (January and July) in a year. The tools and instruments for implementation
of monetary policy in Bangladesh are Bank Rate, Open Market Operations (OMO),
Repurchase agreements

Reserve Management Strategy:

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Form of short term deposits with different high rated and reputed commercial banks and
purchase of high rated sovereign/supranational/corporate bonds. A separate department of
BB performs the operational functions regarding investment which is guided by
investment policy set by the BB's Investment Committee headed by a Deputy Governor.
The underlying principle Bangladesh Bank maintains the foreign exchange reserve of the
country in different currencies to minimize the risk emerging from widespread
fluctuation in exchange rate of major currencies and very irregular movement in interest
rates in the global money market. BB has established Nostro account arrangements with
different Central Banks. Funds accumulated in these accounts are invested in Treasury
bills, repos and other government papers in the respective currencies. It also makes
investment of the investment policy is to ensure the optimum return on investment with
minimum market risk. 

Interest Rate Policy:

Under the Financial sector reform program, a flexible interest policy was formulated.
According to that, banks are free to charge/fix their deposit (Bank /Financial Institutes)
and Lending (Bank /Financial Institutes) rates other than Export Credit.  At present,
except Pre-shipment export credit and agricultural lending, there is no interest rate cap on
lending for banks. Yet, banks can differentiate interest rate up to 3% considering
comparative risk elements involved among borrowers in same lending category. With
progressive deregulation of interest rates, banks have been advised to announce the mid-
rate of the limit (if any) for different sectors and the banks may change interest 1.5%
more or less than the announced mid-rate on the basis of the comparative credit risk.
Banks upload their deposit and lending interest rate in their respective website.

Capital Adequacy for Banks and FIs:

With a view to strengthening the capital base of banks & FIs, Basel-II Accord has been
introduced in both of these sectors. For banks, full implementation of Basel-II was started
in January 01, 2010 (Guidelines on Risk Based Capital Adequacy for banks). Now,
scheduled banks in Bangladesh are required to maintain Tk. 4 billion or 10% of Total
Risk Weighted Assets as capital, whichever is higher. For FIs, full implementation of
Basel-II has been started in January 01, 2012 (Prudential Guidelines on Capital Adequacy
and Market Discipline (CAMD) for Financial Institutions). Now, FIs in Bangladesh are
required to maintain Tk. 1 billion or 10% of
Total Risk Weighted Assets as capital, whichever is higher.

Deposit Insurance:
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The deposit insurance scheme (DIS) was introduced in Bangladesh in August 1984 to act
as a safety net for the depositors. All the scheduled banks Bangladesh are the member of
this scheme Bank Deposit Insurance Act 2000. The purpose of DIS is to help to increase
market discipline, reduce moral hazard in the financial sector and provide safety nets at
the minimum cost to the public in the event of bank failure. A Deposit Insurance Trust
Fund (DITF) has also been created for providing limited protection (not exceeding Taka
0.01 million) to a small depositor in case of winding up of any bank. The Board of
Directors of BB is the Trustee Board for the DITF. BB has adopted a system of risk based
deposit insurance premium rates applicable for all scheduled banks effective from
January - June 2007. According to new instruction regarding premium rates, problem
banks are required to pay 0.09 percent and private banks other than the problem banks
and state owned commercial banks are required to pay 0.07 percent where the percent
coverage of the deposits is taka one hundred thousand per depositor per bank. With this
end in view, BB has already advised the banks for bringing DIS into the notice of the
public through displaying the same in their display board. 

Insurance Authority:
Insurance Development and Regulatory Authority (IDRA) was instituted on January 26,
2011 as the regulator of insurance industry being empowered by Insurance Development
and Regulatory Act, 2010 by replacing its predecessor, Chief Controller of Insurance.
This institution is operated under Ministry of Finance and a 4 member executive body
headed by Chairman is responsible for its general supervision and direction of
business. IDRA has been established to make the insurance industry as the premier
financial service provider in the country by structuring on an efficient corporate
environment, by securing embryonic aspiration of society and by penetrating deep into all
segments for high economic growth. The mission of IDRA is to protect the interest of the
policy holders and other stakeholders under insurance policy, supervise and regulate the
insurance industry effectively, ensure orderly and systematic growth of the insurance
industry. 

Regulator of Capital Market Intermediaries:

Securities and Exchange Commission (SEC) performs the functions to regulate the
capital market intermediaries and issuance of capital and financial instruments by public
limited companies. It was established on June 8, 1993 under the Securities and Exchange
Commission Act, 1993. A 5 member commission headed by a Chairman has the overall
responsibility to administer securities.
 
The mission of SEC is to protect the interests of securities investors, to develop and

12
maintain fair, transparent and efficient securities markets and to ensure proper issuance of
securities and compliance with securities laws. The main functions of SEC are:
Regulating the business of the Stock Exchanges or any other securities market.
Registering and regulating the business of stock-brokers, sub-brokers, share transfer
agents, merchant bankers and managers of   issues, trustee of trust deeds, registrar of an
issue, underwriters, portfolio managers, investment advisers and other intermediaries in
the securities market.
Registering, monitoring and regulating of collective investment scheme including all
forms of mutual funds.
Prohibiting insider trading in securities. Regulating the substantial acquisition of shares
and take-over of companies. Promoting investors’ education and providing training for
intermediaries of the securities market. Prohibiting fraudulent and unfair trade practices
in any securities market. Monitoring and regulating all authorized self regulatory
organizations in the securities market.
Undertaking investigation and inspection, inquiries and audit of any issuer or dealer of
securities, the Stock Exchanges and   intermediaries and any self regulatory organization
in the securities market. Conducting research and publishing information.

Regulator of Micro Finance Institutions:

To bring Non-government Microfinance Institutions (NGO-MFIs) under a regulatory
framework, the Government of Bangladesh enacted "Micro credit Regulatory Authority
Act, 2006’" (Act no. 32 of 2006) which came into effect from August 27, 2006. Under
this Act, the Government established Micro credit Regulatory Authority (MRA) with a
view to ensuring transparency and accountability of micro credit activities of the NGO-
MFIs in the country.

MRA’s mission is to ensure transparency and accountability of microfinance operations

of NGO-MFIs as well as foster sustainable growth of this sector. In order to achieve its
mission, MRA has set itself the task to attain the following goals:
To formulate as well as implement the policies to ensure good governance and
transparent financial systems of MFIs.
To conduct in-depth research on critical microfinance issues and provide policy inputs to
the government consistent with the national strategy for poverty eradication.
To provide training of NGO-MFIs and linking them with the broader financial market to
facilitate sustainable resources and efficient management.

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To assist the government to build up an inclusive financial market for economic
development of the country.
To identify the priorities in the microfinance sector for policy guidance and dissemination
of information to attain the MRA’s social responsibility.
According to the Act, the MRA will be responsible for the three primary functions that
will need to be carried out, namely:
Licensing of MFIs with explicit legal powers;
Supervision of MFIs to ensure that they continue to comply with the licensing
requirements; and
Enforcement of sanctions in the event of any MFI failing to meet the licensing and
ongoing supervisory requirements.
Financial system of Bangladesh

The financial system of Bangladesh is comprised of three broad fragmented sectors:

 Formal Sector,
 Semi-Formal Sector,
 Informal Sector.
The sectors have been categorized in accordance with their degree of regulation.
Formal sector;

The formal financial sector is comprised of money market (comprising operations of the
banking system, micro credit institutions, non bank financial institutions, inter bank
foreign exchange market), the capital market (stock markets), bond market and the
insurance market. Operational activities of these institutions in the formal financial sector
are governed by a number of regulators such as Bangladesh Bank (banking system),
Securities and Exchange Commission of Bangladesh (regulating the stock market
operations), Insurance Regulatory Authority (for insurance institutions), and Micro credit
Regulatory Authority (micro credit institutions). Ministry of Finance also has some
oversight role in certain aspects. The current size of the respective sectors measured in
terms of asset base of the financial sector of Bangladesh is shown in Table 1

Table 1

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Size of Different Segments of the Size as Percentage of GDP
Financial System as Share of Total
Assets of the Formal Financial
Sector and as Percentage of GDP,
June 2013 Percentage Share in
Total Assets of the Formal
Financial Market
Banking Sector 63 60
Stock Market 20 19
Bond Market 16 15
Insurance Market* 3 3

Semi formal sector:

The semi formal financial sector includes those institutions which are regulated otherwise
but do not fall under the jurisdiction of Central Bank, Insurance Authority, Securities and
Exchange Commission or any other enacted financial regulator. This sector is mainly
represented by Specialized Financial Institutions like House Building Finance
Corporation (HBFC), Palli Karma Sahayak Foundation (PKSF), Samabay (Cooperative)
Bank, Grameen Bank, and financial activities/programs (lending and deposit taking) of
various Non Governmental Microcredit Organizations.

Informal financial sector

The informal financial sector includes private intermediaries which are completely
unregulated and sometimes engaged in financial transactions not legally permitted. The
formal financial market in Bangladesh comprises mainly of money market, stock market,
bond market, insurance market, foreign exchange market and micro-financial market.
The discussions of this paper will focus primarily on the formal sector of the financial
market.
The financial market is dominated by the banking sector which is the most important part
of the money market. The capital market makes up the second most significant segment
of the financial system. The third most important segment of the financial system of
Bangladesh is the bond market, dominated by treasury bills and saving instruments issued
by the National Saving Directorate (NSD) of the Ministry of Finance. The insurance
sector is quite old but its size is still relatively small.

The financial market in Bangladesh is mainly of following types:

15
  Money Market: The primary money market is comprised of banks, FIs and
primary dealers as intermediaries and savings & lending instruments, treasury
bills as instruments. There are currently 15 primary dealers (12 banks and 3 FIs)
in Bangladesh. The only active secondary market is overnight call money market
which is participated by the scheduled banks and FIs. The money market in
Bangladesh is regulated by Bangladesh Bank (BB), the Central Bank of
Bangladesh.

Capital market: The primary segment of capital market is operated through private and
public offering of equity and bond instruments. The secondary segment of capital market
is institutionalized by two (02) stock exchanges-Dhaka Stock Exchange and Chittagong
Stock Exchange. The instruments in these exchanges are equity securities (shares),
debentures, corporate bonds and treasury bonds. The capital market in Bangladesh is
governed by Securities and Commission (SEC).

Foreign Exchange Market: Towards liberalization of foreign exchange transactions, a

number of measures were adopted since 1990s. Bangladeshi currency, the taka, was
declared convertible on current account transactions (as on 24 March 1994), in terms of
Article VIII of IMF Article of Agreement (1994). As Taka is not convertible in capital
account, resident owned capital is not freely transferable abroad. Repatriation of profits
or disinvestment proceeds on non-resident FDI and portfolio investment inflows are
permitted freely. Direct investments of non-residents in the industrial sector and portfolio
investments of non-residents through stock exchanges are repatriable abroad, as also are
capital gains and profits/dividends thereon. Investment abroad of resident-owned capital
is subject to prior Bangladesh Bank approval, which is allowed only sparingly.
Bangladesh adopted Floating Exchange Rate regime since 31 May 2003. Under the
regime, BB does not interfere in the determination of exchange rate, but operates the
monetary policy prudently for minimizing extreme swings in exchange rate to avoid
adverse repercussion on the domestic economy. The exchange rate is being determined in
the market on the basis of market demand and supply forces of the respective currencies.
In the forex market banks are free to buy and sale foreign currency in the spot and also in
the forward markets. However, to avoid any unusual volatility in the exchange rate,
Bangladesh Bank, the regulator of foreign exchange market remains vigilant over the
developments in the foreign exchange market and intervenes by buying and selling
foreign currencies whenever it deems necessary to maintain stability in the foreign
exchange market.
The informal sector includes private intermediaries which are completely unregulated

16
Financial Market  Financial System of Bangladesh

Formal Sector Semi-Formal Sector Informal

Sector

Regulators & Specialized Financial Institutions:

1. House Building Financial Corporation
Institutions
2. Palli Karma Sahayak Foundation
Money 3. Samabay Bank
Market(Ba 4. Grameen Bank
Bangladesh
nks,
Bank (Central
NBFIs,
Bank)
Primary
Capital
Dealers) Banks
Market(Investm 56 scheduled & 4 non-scheduled
ent banks, S.E, Banks
etc)

Foreign
Exchange NBFIs
Market 31 NBFIs

Insurance Development &

Regulatory Authority

Insurance Companies
18 Life & 44 Non-Life Insurance
Companies

Securities & Exchange Commission (Regulatory

of capital market Intermediaries)

Microcredit Regulatory Authority

( MFI Authority)

Structural Reforms of 1980s and 1990s

Bangladesh’s financial system was characterized as a very repressed financial system

before the advent of reforms in the 1980s. Both the market and institutions, in the post-

17
independence period faced major structural problems, evident both in the money market
comprising the banking and other sectors as well as the capital market.
In order to counter these problems, the first round of financial sector reform was initiated
in 1982 with the denationalization of some commercial bank followed by the
establishment of the 4 commercial bank.
The banking sector, which was the dominant sub-sector of the country’s financial system
and still remains most dominant, has undergone major transformations through various
reforms. The reform programmers initiated focused on several dimensions, namely
privatization of state-owned commercial banks (SCBs) and entry of new private and
foreign banks. Other areas the reforms were directed towards include: recovery of non-
performing loans (NPL); interest rate deregulation; central bank's increased autonomy;
strengthened prudential regulation and supervision; rationalization and merger of bank
branches; and improvements in the functioning of the money market. As the views
towards denationalization and private sector participation in the banking system changed,
the initial phase of banking reform (1980-1990) focused on the promotion of private
ownership of commercial banks and denationalization of some nationalized commercial
banks (NCBs).
Table 2

Assets of the Banking Non-Interest Total Assets Operating Cost as a

Sector as on June Operating Cost % of Total Assets
2013 Type of Banks
State-owned 1421.36 201315.32 0.706
Commercial Banks
Specialized 829.59 42401.66 1.957
Development Banks
Private Commercial 5046.95 462820.63 1.090
Banks
Foreign Banks 525.04 46112.57 1.139
Total 7822.94 752650.18 1.039

It was not till the mid-1980s that banks felt the strong compulsion to adopt reform
measures. Once the weakness of the sector was identified, the government privatized
three nationalized commercial banks during 1984-86 and granted licenses to four private
commercial banks in the early 1980s. This round of reform, however, did not bring about
the desired improvements and was considered largely unsuccessful due to regulatory and
supervisory weaknesses of Bangladesh Bank, abusing of the banks’ assets by the newly
private managements/owners of the private commercial banks (PCBs) and NCBs' interest
groups which resulted in a loan default culture.

18
While the issue of regulation and supervision was spelled out in FSRP and the banks
adopted Basel I norms (maintaining adequate capital to withstand crisis) in 1996, it was
indeed the reforms in post 2000 that had a de facto focus on risk-based banking
supervision. Moreover, the Central Bank Strengthening Project initiated in 2003 focused
on effective regulatory and supervisory system for the banking sector, particularly
strengthening the legal framework, automation and human resource development and
capacity building of BB.
The Enterprise Growth and Bank Modernization Project was adopted in 2004 by the WB
to help the government achieve a competitive private banking system through a staged
withdrawal through divestment and corporatization of a substantial shareholding in the
three public sector banks (Rupali, Agrani and Janata), and divestment of a minority
shareholding in the largest state bank, Sonali. Ths program however did not achieve
much success due to resistance from within and political changes afterwards.

Proposed Financial System for Bangladesh

Overview of Bank and FIs

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Bank: 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: These are

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 5 SOCBs which are fully
owned by the Government of Bangladesh.
 Specialized Banks (SDBs): 3 specialized banks are now operating which were
established for specific objectives like agricultural or industrial development.
These banks are also fully owned by the Government of Bangladesh.
 Private Commercial Banks (PCBs): There are 39 private commercial banks which
are 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.
There are now 4 non-scheduled banks in Bangladesh which are:
1. Ansar VDP Unnayan Bank,
2. Karmashangosthan Bank,

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 3. Probashi Kollyan Bank,
4. Jubilee Bank

Fis

Non Bank Financial Institutions (FIs) are those types of financial institutions which are
regulated under Financial Institution Act, 1993 and controlled by Bangladesh Bank.
Now, 31 FIs are operating in Bangladesh while the maiden one was established in 1981.
Out of the total, 2 is fully government owned, 1 is the subsidiary of a SOCB, 13 were
initiated by private domestic initiative and 15 were initiated by joint venture initiative.
Major sources of funds of FIs are Term Deposit (at least six months tenure), Credit
Facility from Banks and other FIs, Call Money as well as bond and Securitization.

The major difference between banks and FIs are as follows:

 FIs cannot issue cheques, pay-orders or demand drafts.
 FIs cannot receive demand deposits,
 FIs cannot be involved in foreign exchange financing,
 FIs can conduct their business operations with diversified financing modes like
syndicated financing, bridge financing, lease financing, securitization instruments,
private placement of equity etc

Product and Services

Products: Bank can provide a safe and convenient way to accumulate savings and offer
services that can help customer to manage their savings are called bank product. Bank
product are given below:

 Customer loan product  Education loan

 Consumer deposit product  School banking account

 SME products  Insurance covered monthly

 Credit cards  Car loan scheme

 Debit cards  House repairing and renovation

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  Student banking  Home improvement laon

 Internet banking  Consumer finance scheme

 VISA corporation  Current account

 Remittance card Home credit  Savings bank deposit account

 Auto loan  Special notice deposit account

 savings scheme  Special savings scheme

 Home loan\house building finance  Special deposit scheme

Services: Banking service means the various in which a bank can help a customer,
such as operating accounts, making transfers, paying standing orders and selling
foreign currency. Others services provided by bank are as follows :

 Price sensitive information  Online banking service

 Hajj remittance service  Foreign remittance service

 Treasury  Internet banking service

 Interest rates  SMS service

 Schedule of charge  SWIFT service
 General banking service  Locoer service
 Investment service  Offshore banking units
 Foreign exchange business service  SME service
 SME service  NRB service
 HAJJ remittance service  Investment scheme

Electronic Banking system in Bangladesh

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Electronic banking is one kind of banking system where all kinds of banking activities
are being performed through electronic media such as internet, online and mobile etc.
Electronic channels are used for both business-to-business and business-to-customer
transactions, such as ordering goods, delivering software or paying for such transactions.
Establishing E-banking infrastructure has been a challenging task for the developing
countries like Bangladesh. At present, there is no infrastructure for performing
Electronic-banking activities in Bangladesh. But nowadays with the help of various
media of online e-banking facilities are improving. With the help of E-banking bank can
perform following activities

• Automatic deposit and withdrawal of money

• Quick transfers of funds from one account to other, even to another bank
• Payment of utility bills, salary, opening of LC, being in the home or the
office.
• Balance enquiry, receipt of transaction statement
• Instructing the broker
• Disabling the lost debit card or credit card, checking accounts
• Apply and issuance for new debit / credit card or checkbooks.

Different forms of electronic banking

There are different types of E-banking are available such as Pc banking, online banking,
internet banking, telephone banking and mobile banking. These are discussed below

PC banking: 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.

Types of PC banking: There are two types of PC banking one is Online banking other
is Internet banking.

Online banking: It is online banking, in which bank transactions are conducted within
closed networks. The customer needs specialized software provided by his bank.

Internet banking: It is Internet banking, which German banks have been offering since
the mid-nineties, although the only product they were offering at the time was
information. Unlike closed networks, Internet banking permits the customer to conduct
transactions from any terminal with access to the Internet.

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Telephone banning: Tele-banking service is provided by phone. To access an account it
is required to dial a particular telephone number.

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.

Other forms of E-banking:

1. Any branch banking/ anywhere banking.

2. SMS banking.
3. Electronic fund transfer system.
4. Card-Debit/ ATM card and credit card.
5. Virtual banking.

Current scenario of E-banking in Bangladesh: Electronic banking is relatively new

concept in Bangladesh. Formerly only the foreign banks operating in Bangladesh like
Standard Chartered Bank, HSBC, etc provided it. These foreign banks managed to gain
competitive advantage with the introduction of electronic banking for the first time in
Bangladesh. As result the local commercial banks started to loose their market to these
foreign commercial banks. So they reacted very quickly.

In terms of adoption of E-Banking we can divide our banking sector in to three basic
categories

1. Classical Banks: Classical bank includes those commercial banks, which don’t
provide or provide very little E-banking facilities. In our country these category mainly
includes mainly Nationalized Commercial banks

2. Modern Banks: Currently some of the banks of Bangladesh are providing electronic
services to their customers we cannot say they are completely following electronic way.
Because they offer some of the functionalities of the complete electronic banking like
intra-bank transactions, Letter of Credit (LC) and foreign exchange etc. In case of inter-
bank transactions, central bank authority handles the procedure all the banks are termed
as modern banks this is the largest segment of commercial banks among the three. These
commercial banks which are much more innovative, flexible, and proactive in their
operation.

Other services:
1. ATM Card
2. Any branch Banking
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 3. Software used

3. Electronic Banks: Electronic banking as a segment of electronic business, which, in

turn, encompasses all types of business performed through electronic networks. Banks in
this category are more electronically service oriented than the above-mentioned
commercial banks. Electronic bank include those commercial banks, which uses
sophisticated computer and networking technology to carryon their day-to-day banking
business

Other services:
1. Depends on IT
2. Card services
3. Enhances competition

Contribution and impact of E-banking

Electronic Banking has greater impact in the economy and in the banking sector as well.
Making financial services available to the poorest people is recognized as an important
part of poverty reduction strategies. Technological innovation offers significant hope,
although it will result in fundamental changes to banking delivery mechanisms as well as
to the very role of banking service providers and their relationships with customers. The
advantage of the digital economy necessitates revisiting our understanding of banking
and microfinance, and our perception of delivery mechanisms.

Limitation of E-banking:
Huge Number of branches all over the Bangladesh even outside the country and for the
purpose of automation huge investment is necessary. Most of the branches are in the rural
areas where there are no modern digital communication facilities. .Most of the users or
clients of the banks are poor and uneducated village people having no knowledge about
electronic banking and cannot afford it at the current cost level. Most of the officials of
these banks in the classical stage especially the state owned ones are aggie and cannot
understand and are reluctant to accept modern electronic banking. To turn around these
banks at first the outdated mentality of these officials of the classical banks. Illiteracy is a
great problem in consideration of E-Banking activities execution.

Electronic Banking has greater impact in the economy and in the banking sector as well.
Making financial services available to the poorest people is recognized as an important
part of poverty reduction strategies. Technological innovation offers significant hope,
although it will result in fundamental changes to banking delivery mechanisms as well as
to the very role of banking service providers and their relationships with customers. In
case of productivity, efficiency, economic growth, giving optimum service to the
customers, electronic banking has huge contribution as a whole.
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 Developments in Financial Sector of Bangladesh

With the development of banking day by day our country financial sector develop
gradually. Many new ways and organization are offered different types of service. These
developments are given below;

Automation and Technological Development:

Banking sector experienced remarkable progress in respect of automation in functioning
in last several years. For the pro-active and forward-visioning approach of Bangladesh
Bank, numbers of automation initiatives have been implemented in banking sector. These
initiatives include:

To create a disciplined environment for borrowing, the automated Credit Information

Bureau (CIB) service provides credit related information for prospective and existing
borrowers. With this improved and efficient system, risk management will be more
effective. Banks and financial institutions may furnish credit information to CIB database
24 by 7 around the year; and they can access credit reports from CIB online instantly.

L/C Monitoring System has been introduced for preservation and using the all necessary
information regarding L/C by the banks through BB website. This system allows the
authorized users of banks to upload and download their L/C information.

 In terms of article 36(3) of Bangladesh Bank Order, 1972, all scheduled banks are
subject to submit Weekly Statement of Position as at the close of business on every
Thursday to the Department of Off-site Supervision. This statement now is submitted
through on-line using the web upload service of BB website within o3 (three) working
days after the reporting date which is much more time and labor efficient that the earlier
manual system.

The e-Returns service has been introduced which is An Online Portal Service for
Scheduled Banks to submit Electronic Returns using predefined template for the purpose
of Macro Economy Analysis through related BB Departments. 

Online Export Monitoring System is used for monitoring export of Bangladesh. Through
this service, Banks and AD Branches of Banks issue & reports export report.

Bangladesh Automated Clearing House (BACH) started to work by replacing the ancient
manual clearing system which allows the inter-bank cheques and similar type instruments
to be to settled in instant manner. 

Electronic Fund Transfer (EFT) has been introduced which facilitates the banks to make
bulk payments instantly and using least paper and manpower.

26
The initiation of Mobile Banking has been one of the most noteworthy advancement in
banking. Through this system, franchises of banks through mobile operators can provide
banking service to even the remotest corner of the country.

Almost every commercial bank is now using its own core banking solution which has
made banking very faster and efficient. Usage of plastic money has much more increased
in daily life transactions. Full or partial online banking is now being practiced by almost
every bank.

Inauguration of internet trading in both of the bourses (DSE & CSE) in the country is the
most significant advancement for capital market in last several years. Micro Finance
Institutions submit their reports to the regulator through the Online Report Submission
Tools for MFIs.

Institutional Development:
Through the Central Bank Strengthening Project, there have been a good number of
achievements regarding the institutional development in BB which can be observed
below:

The implementation of Enterprise Resource Planning (ERP) has been a big step in
automation of operational structure of BB.

The establishment of Enterprise Data Warehouse (under process) will bring the whole
banking and FI industry under a single network through which data sharing, reporting and
supervision will enter in a new horizon.

Bangladesh Bank now possesses the most informative and resourceful website of the
country regarding economic and financial information.

Internal networking system with required online communication facilities have been
developed and in operation for the officers of BB.

BB has hosted number of international seminars on different economic and financial

issues over last several years.   

MRA was established in 2006 for bringing NGO-MFIs under supervision. For the pro
active role of MRA, this sector (MFI) is now in a good shape regarding the accountability
and regulation.
For abolishing anomaly and fetching discipline in insurance industry, IDRA was
established in 2011. In one year, IDRA has taken number of appreciable steps to
regularize this industry.
After the massive crash of local bourses in 2010-2011, the executive body of SEC was
redesigned in full and some good results have come after that. 

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Regulatory Development:

Banking and FI industries have experienced diversified regulatory development over last
few years.

Full implementation of Basel-II (International capital adequacy standard) accord has been
in effect in both banking and FI industry.

Guidelines on Environmental and Climate Change Risk Management for banks and FIs
have been circulated. Policy guidelines on Green Banking also have been issued.

Guidelines on Stress Testing for banks and FIs have been issued which is aimed to assess
the resilience of banks and FIs under different adverse situations.

Number of Policy initiatives for Financial Inclusion has been undertaken. 

Banks have been asked to build up separate Risk Management Unit for comprehensive
and intensive risk management.

Banks have been instructed to create separate subsidiary for capital market operations and
capital market operations of banks are now minutely monitored.

Supervision has been intensified to increase the participation of banks in Corporate Social
Responsibility (CSR).

For the efficient and timely action of BB, foreign exchange reserve of Bangladesh did not
face any adversity during global financial turmoil of 2007-09.

To meet international standard on Anti Money Laundering (AML)/Combating Financing

of Terrorism (CFT) issues, guidelines for Money Changers, Insurance Companies and
Postal Remittance have already been circulated.

SEC has updated Public Issue Rules, 2006 and Mutual Fund Rules, 2001. Apart from
that, numbers of AMCs, merchant banks and are Mutual Funds are permitted by SEC
which has increased the participation of institutional investors. The trend of capital
market research has been upward which indicates the potential of analytical investment
decision.

Potentials and problems of banking business in Bangladesh

Although lots of development bringing by bank in our economy, lots of problem are
prevailed in banking business of Bangladesh. The problems faced by banking business
are given below

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Lack of sufficient fund: As a developing country we always face insufficiency of fund.
For that person who wants to set bank, cannot set bank. For the lack of fund bank can not
provide better services to its customer.

Corruption: For corruption bank can not provide its regular services. They have to give
loan the person who is unsound mind to pay back money. It is great problem for banking
of our banking business.

Political unrest: We everybody know that our country have political instability, for the
instability of political work bank cannot provide a better service to customer.

Illiteracy of people: The people of our country are not enough known about the banking
system. They do not believe of bank that’s why they do not want to keep the money into
the bank for their illiteracy.

Poor access to credit: This one factor that has been continued to pointed out of the major
problem of banking business in Bangladesh.

Inadequate infrastructure: For lack of fund our bank infrastructure did not develop
enough.

Others problems faced by banking business in Bangladesh are given below;

 Proper business knowledge

 Frequent policy changes
 lack of supply chain management

Problem of E-banking in Bangladesh are given in below by chart

Problems Indicator

Software available in the country is not suitable.

Hardware available is not sufficient in the
Infrastructure Barriers
country.
Limited trained Human Resources.
Improper Use Of Technology.
Lack of Technological Knowledge.
Knowledge Barriers
Lack and limitation of regulation and law.
Increased potential of fraud.
Lack of strong trust environment.
Legal And Security Barriers

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 Bank participation in economic development

Bank is the dominator of financial system of a country. After the liberation war, many
banks have been established. The primary purpose of bank is to create loan and collection
of deposit. A bank may participate in the economic development by lending in various
financing sector. A countries economy is fully unable without establishment of bank.
Bank work for in our countries economic development most. By participating the
following work bank help to develop our economy;

Safe custody of Money:

Banks saving deposit of people with an assurance of returning it upon demand. This
provides safety of the depositors’ money, which if not deposited, could be stolen, lost or
wasted from the household

Employment:
Banks provide capital for setting up new industries- businesses BMRE of existing
industries- business which create scope of employment of new labors, managers and
other kind of employee.

Controlling Money market:

The economy of a country is mainly controlled by its money market. The Central Bank
with the help of other commercial banks performs its monetary policy to control the
money market.

Agricultural Development:
Commercial bank and the Agricultural bank provide loan for the purpose of purchasing
Seed, Fertilizer and equipment to the agricultural sector for the development of the
economy.

Industrial Development:
Commercial Bank and the Industrial bank provide loan facilities for the establishment of
Large and Small & cottage industry which ultimately effect the development of the
economy of a country.

Building relationship:
Banks create a breeze relationship between the home and the foreign people by the acting
role of middlemen.

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Regional Development:
Bank finds out the underdeveloped are of a country and taking role by its operating
activities for the development of the region.

Formation of Money Market:

Central Banks create, operate and control the money market of an economy with the help
of his commercial bank by strategic policies which are formulated by the ministry of
finance.

Help in import and Export:

Modern bank facilitate trade and commerce by rendering valuable services to the
business community. Apart from providing appropriate mechanism for making payments
arising out of trade transactions, the banks gear the machinery of commerce, specially in
case of international commerce, by acting as a useful link between the buyer and the
seller, who are often too far away from the too unfamiliar with each other.

Acts as treasurer of the Government:

Central Bank keeps reserve in Government’s money and other assets without any interest
and also to maintain local and foreign transaction. So it is called the treasurer of a
government.

Discounting of bill of exchange:

Every bank performs their function by purchasing and discounting local and foreign bills
and earns revenue from it. When the commercial bank fall in Bank run the commercial
bank also rediscounting the commercial Bank’s discounted bill and give the adequate
money.

Future Prospect of Banking Business In Bangladesh

Over the last few years the banking world has been undergoing a lot of changes due to
deregulation technology innovations, globalization etc. These changes also made
revolutionary changes of a country’s economy present world is changing rapidly to face
the challenge of competitive free market economy. It is well recognized that there is an
unguent need for better qualified management and better trained staff in dynamic global
financial market Banking sector in Bangladesh is trying to develop the skill of human
resources. Already Banks add various new modern banking system that delivers the new
31
and traditional banking products and services to the customers such as Electronic banking
system, Internet banking/ online baking, mobile banking services . In Bangladesh the
expansion of banking business is best with various constrains. Bangladesh bank
modernizes country payment system and commitment by the government in building
Digital Bangladesh have brought competition among the scheduled banks to improve
banking services and rapidly adopt e-banking on a winder scale. Bangladesh bank
assumes that new bank will also be able to meet the unfulfilled demand by the private
sector. The central bank noted that, for new banks the ratio of opening rural and urban
branch will be 1:1 which will help increases bank branches in rural areas.
The future prospect of banking given below:

Core Banking:
Core banking is a general term used to describe the services provided by a group of
networked bank branches. Bank customers may access their funds and other simple
transactions from any of the member branch offices.

Internet Banking:
The Internet Banking provides a secure medium for transferring funds electronically
between bank accounts and also for making banking transaction over the Internet.

Mobile Banking
Mobile banking involves the access to, and provision of, banking and financial
services through mobile devices.

SMS Banking:
Short Message Service (SMS) is the formal name for text messaging. SMS banking
allows customers to make simple transactions to their bank accounts by sending and
receiving text messages.

Electronic Funds Transfer:

Electronic Funds Transfer (EFT) is a system of transferring money from one bank
account to another without any direct paper money transaction.

Any Branch Banking:

Any branch banking is the service where an account is accessible from any branch of a
particular bank. In Bangladesh the term is widely popularized as online banking.

Automated Teller Machine (ATM):

ATM means computerized machine that permits bank customers to gain access to their
accounts and permit them to conduct some limited scale banking transactions with a
magnetically encoded plastic card and a code number.
32
Point of Sale:
Point of Sale (POS) service is an innovative electronic money transferring system that
allows the customers of banks to pay for their purchases through their ATM and credit
card at any POS enabled retailer.

Debit Cards:
Debit cards are linked directly to the bank account of its holder. The holder of debit card
can use it to buy goods or withdraw cash and the amount is taken from the bank account
right away.

Credit Cards:
A credit card is a form of borrowing. Credit cards allow its holder to 'buy goods now and
pay later' - called 'buying on credit'. They aren't linked to the bank account of the
customers.

SWIFT:
The Society for Worldwide Interbank Financial Telecommunication ("SWIFT") operates
a worldwide financial messaging network which exchanges messages between banks and
other financial institutions.

MICR:
MICR (Magnetic Ink Character Recognition) is a character recognition technology
adopted mainly by the banking industry to facilitate the processing of cheque.

Conclusion/ Recommendation of our analysis

The development of financial sector and the development of our economy, Business
impact of our economy, Bank has profound impact. The Banking sector in any country
plays an important role in economic activities. Bangladesh is no exception of that. As
because it’s financial development and economic development are closely related, that’s
why the private commercial banks are playing significant role in this regard. During the
three months internship program, almost all the desks have been observed more or less.
This internship program, in first, has been arranged for gaining knowledge of practical
banking and to compare this practical knowledge with theoretical knowledge. Though all
departments and sections are covered in the internship program, it is not possible to go to
the depth of each activities of branch because of time limitation. However, highest effort
has been given to achieve the objectives.

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 References

 www.Bankinfo.bd
 www.bdresearch.org
 www.scribd.com
 www.conpro.com
 www.academicjournal.org
 www.icmab.org.bd
 www.thefinancialexpress-bd.com
 www.academia.edu
 www.Businessdictionary.com
 www.Wikipedia.com
 www.Bangladesh-bank.org.com
 www.bankinfo.com
 Banking and insurance book
 www.assaignmentpoint.com

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