Fiftieth year of Bangladesh banking

 Shah Md Ahsan Habib | Published:  December 28, 2020 20:56:05 |

Updated:  December 29, 2020 21:23:40

Banking sector of Bangladesh commenced its journey under the leadership of

the Father of the Nation Bangabandhu Sheikh Mujibur Rahman as part of his
economic rebuilding movement in the newly independent Bangladesh in a
situation of difficult economic and natural shocks. The newly independent
nation inherited a fragile banking structure consisting of two Bangladeshi
banks with 155 branches, 10 Pakistani banks with 920 branches, and three
foreign banks with 14 branches. In such a circumstance, the foundation of the
independent banking system of Bangladesh was laid through the establishment
of the Bangladesh Bank -- the central bank of the country by the Presidential
Order No. 127 of 1972 that took effect from December 16, 1971.

Bangladesh banking sector started with six nationalised entities: Sonali,

Agrani, Janata, Rupali, Pubali, and Uttara Bank under Bangladesh Bank
Nationalisation Order 1972. After that, to ensure adequate credit facilities to
the industry and agriculture sector, the then government set up three
specialised institutions -- Bangladesh Shilpo Bank, Bangladesh Shilpo Rin
Songstha, and Bangladesh Krishi Bank.  Foreign banks, functioning at that
time, were also allowed to operate.  

Reform initiatives have notable implications for the changes and development
of the banking sector of Bangladesh. Initiatives to reform the banking sector
in Bangladesh may be traced to the beginning of the 1980s when a few private
sector banks were allowed and denationalisation of the Uttara Bank and Pubali
Bank took place. Money, Banking, and Credit Commission was constituted in
the mid-1980s to define the scope and modalities of the early phase of the
reform. As part of the reform, a new system of loan classification and
provisioning was introduced in 1989. Practically, wide-ranging banking
reform measures were undertaken under World Bank's Financial Sector
Reform Project (FSRP) in the 1990s under which the focus of reforms
included gradual deregulations of the interest rate structure, providing market-
oriented incentives for priority sector lending, and improvement in the debt
recovery environment. After the expiry of FSRP in 1996, the government of
Bangladesh formed a Bank Reform Committee (BRC) that gave highest
priority to the restructuring of the supervisory and regulatory set up for
ensuring strong system of enforceable oversight of banks. While the issue of
risk-based supervision and adoption of Basel-I were spelled out in FSRP, it
was indeed the reforms in post-2000 that had a de facto focus on risk-based
banking supervision. The Central Bank Strengthening Project (CBSP) initiated
in 2003 focused on effective regulatory and supervisory systems for the
banking sector, particularly strengthening the legal framework, automation,
and human resource development and capacity building of the central bank.
The Enterprise Growth and Bank Modernisation Project were adopted in 2004
by the World Bank to help the government achieve a competitive private
banking system and corporatisation of a substantial shareholding in the public
sector banks. After the expiry of BRC/CBSP programme, there were many
remarkable regulatory and supervisory initiatives for the consolidation of the
banking sector. Regulatory changes have been installed in several areas either
to align these with the global standards or to address internal needs and
requirements.

Following the privatisation initiatives in the banking industry in 1982, a good

number of private commercial banks have been allowed in mid-1993-95, and
2012-13. By the time the banking industry of the country was restructured into
a setup with 59 scheduled banks of which 41 are private commercial banks,
six state-controlled commercial banks, three specialised banks, and nine
foreign bank branches.  Of the private commercial banks, nine are Islamic
banks, and several other banks are offering Islamic banking services using
Islamic banking branches and windows. There are also five more institutions
for pursuing special objectives but these are not scheduled banks.

Bank branch expansion was very rapid for the government-owned banks in the
first decade till 1980 mainly in the rural areas, as the then government was
particularly eager to expand banking services in rural Bangladesh.   However,
over the years the focus shifted from rural to urban banking with the growing
market share of private commercial banks. Currently, the proportion of rural
bank branches is below half and almost half of the bank branches are owned
by the private commercial banks. Private commercial banks have even higher
dominance in terms of assets, deposits, and advances. Rural deposits of banks
started picking in recent years. Especially, the proportion of rural deposits
increased remarkably in this decade. However, nine-tenth of the total
outstanding credit has been in urban areas. 

The distribution of manpower employment and total income by the broad bank
groups help indicate their contribution to employment generation, operational
structure, processes, cost, and level of automation. With higher number of
banks and their branch set up, private commercial banks employed the highest
number of employees followed by state-controlled commercial banks to run
their banking operations. As of 2019-20, around two hundred thousand
employees were working with commercial banks operating in the country:
Private banks were 2.3 times bigger than state-controlled and 31 times bigger
than foreign banks in terms of the number of manpower, whereas private
banks were 3.8 times bigger than state-owned and 11 times bigger than foreign
banks in terms of total income. Foreign banks were creating lower
employment, but well-positioned in terms of efficient processes and
automation.    

There is no doubt that banking sector of the country improved in terms of

services, profitability, efficiency, and risk absorption capacity over the years.
It is, however, not easy to capture and compare periodical and inter-bank
group performance status of the banking activities of the country when their
purposes, operational procedures are different. And, the estimation processes
of certain indicators in line with the regulatory requirements changed over
time. Though private and foreign banks have been consistently focusing on
profit motives in their operations as commercial banking entities, the focus
and operational processes for state-controlled banks have mainly targeted
attainment of national goals and priority sectors. Specialised banks have been
designed for supporting priority sectors. However, despite notable
improvement, banking sector of Bangladesh has challenges associated with the
key indicators of financial health: non-performing loans and corporate
governance practices.

There is no doubt that the banking industry has been playing a remarkable role
in supporting the economic growth of the country over the years. Banks have
been engaged in short-term, medium-term, and long-term financing since
inception, and have been playing roles of banks, non-bank financial
institutions, and capital market single-handedly. Alongside offering payment
and credit services in domestic business and economic activities, international
trade and foreign exchange activities have increasingly been facilitated by the
banking institutions of the country. Improvements in terms of performance
indicators are visible and appreciable. However, challenges of the sector must
not be ignored for ensuring greater and consistent contribution. Moreover,
banking sector now needs to handle Covid-19 situation efficiently for
sustainable banking operation in the coming days.

For better future of the banking industry, we need to design multiple pressure
elements for addressing willful defaults and undertake measures for
supporting defaulters for genuine reasons. The growing number of market
players in the financial market should ensure greater competition, efficiency,
and innovation. The higher number of banks should ensure greater financial
inclusion in a country where still a section of people remains out of the scope
of banking services. The country requires an in-depth analysis of the relevant
information on the developmental levels of small manufacturing clusters of
the country. There should also be initiative and advocacy for setting up of
regulatory authority for Warehouse Receipt Systems and a commodity
exchange to support agricultural financing further.   Platforms like mobile and
agent banking have received momentum in recent times in Bangladesh. Covid-
19 outbreaks have proven the relevance and importance of these banking
ventures. Especially, expansion move of agent banking is inspiring, and
sustaining of the model might prove to be a remarkable force for reaching the
rural vulnerable at reasonable cost. Alongside adoption of technology and
promoting innovations, mapping shadow banking entities and activities based
on certain regulatory criteria is the need of the time.   Development of other
segments of the financial sector is also relevant for the sustainable banking
operation of Bangladesh.

The banking sector is presently fighting the corona situation and supporting
the government efforts for handling the crisis. It is high time for banks to
reassess existing policy and business strategy and to move beyond crisis
management. A wide-ranging transformation covering human resources,
organisational structure, governance and culture might be on the card. It might
include significant workplace transformation, renewed and remarkable boost
of IT and fin-tech, and moving towards comprehensive digitalisation. Also,
banks are expected to play lead roles in the country's upcoming green
financing and the green growth movements. For policy-making bodies, boards,
and top management associated with banks, it is about shouldering greater
responsibilities and reflecting accountability to the society for the sake of the
long term business, economic and social benefits in this crisis-ridden
environment.

Shah Ahsan Habib, PhD, is a professor at the Bangladesh Institute of Bank

Management (BIBM).

ahsan@bibm.org.bd