FIN – 433

Financial Markets and Institutions

Sec: 3

Report on the Condition of Commercial Banks in Bangladesh

Submitted To:
Hasan A. Mamun
Lecturer
Department of Accounting & Finance
School of Business & Economics (SBE)

Submitted By:
1. Imrul Farhan Pritom ID: 1620326030
2. Abid Hasan Roman ID: 1330807030
3. Showrob Hossain ID: 1721827630
 Introduction

Banks are one of the most important sources of funds for businesses. Among depository intuition,

commercial banks on aggregate are the most dominant. They offer a wide variety of deposit

accounts to surplus units and transfer those funds deposited by surplus units to deficit units by

providing direct loans or purchase of debt securities. Their services are utilized by households,

businesses, and government agencies. Even though Bangladesh had entered into the list developing

countries of the United Nations it is still regretful that even after 48 years of liberation our country

is still in a nascent stage in terms of the developed financial system. Its two capital markets are

very much weak, which already have seen major collapses two times i.e. in 1996 and 2010. Due

to various factors and hindrances, the banking industry of Bangladesh has been suffering from a

liquidity crisis.

Brief Overview of Commercial Banks in Bangladesh

Most of the finance in the country is provided by the banking sector of Bangladesh. There is a total

of 59 scheduled banks in Bangladesh that 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. The scheduled banks are categorized into the following

• 6 state-owned commercial banks (SOCBs): for example, Sonali Bank, Rupali Bank

• 3 Specialized Banks (SDBs): For example, Bangladesh Krishi Bank, Rajshahi Krishi

Unnayan

• Government-Owned Development Financial Institutions (DFIs)

• 33 conventional Private Commercial Banks (PCBs): For example, Prime Bank, NCC Bank

Limited, United Commercial Bank Ltd., Bank Asia Ltd.

1
 • 8 Islami Shariah based PCBs

• 9 Foreign Commercial Banks (FCBs): For example, HSBC, Standard Chartered Bank,

Wari Bank.

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 in scheduled banks. There are now 6

non-scheduled banks in Bangladesh which are:

• Ansar VDP Unnayan Bank,

• Karmashangosthan Bank,

• Grameen Bank,

• Jubilee Bank,

• Probashi Kollyan Bank,

• Palli Sanchay Bank

Functions of Commercial Banks in Bangladesh

2
 Growth of Commercial Banks in Bangladesh

The banking sector of Bangladesh has promoted financial inclusion of the very poor in rural areas

of which microfinance and microcredit are the policy instruments to achieve that objective. This

has helped to expand the monetization of the rural economy, and that makes the banking sector

become more market-oriented. Such market orientation of the rural economy also facilitated

repeatedly resource transfer from rural areas to urban areas. Commercial banks have been playing

an important role in the economic development of Bangladesh. They provide investible funds to

both the public sector, and especially the private sector. Further, they have played a significant

role in respect the four major drivers of economic growth in Bangladesh which are:

• Considerable expansion of the RMG sector since the late 1970s. The RMG sector

accounts for around 82 percent of total exports. Bangladesh's garment exports increased

from US$ 6.8 billion in 2005 to over US$30 billion (The Financial Express, July 05,

2018)

• Being a labor surplus country

• The remarkable progress of the agriculture sector despite the continued loss of arable

land.

• Small and medium enterprises (SMEs) have played a vital role in promoting economic

growth, poverty reduction, and employment generation. To efficiently run SMEs,

allocation of adequate funds and skill development of both entrepreneurs and workers

are needed.

Banks have contributed considerably to the process of the economic growth of Bangladesh.

However, their contribution would have been greater, if they had effectively addressed various

3
challenges faced by the banking sector such as weak management, poor governance, lack of strong

leadership, and non-compliance with ethical standards leading to various types of banking scams

such as money laundering and NPLs (The Financial Express, January 11, 2019).

In the chart below we can see the growth of profit by banks in Bangladesh where the majority are

commercials banks in Bangladesh.

Problems Commercial Banks are facing in Bangladesh

The banking sector of Bangladesh has been suffering due to a variety of factors and presently the

sector is going through liquidity crisis. The rate of default has been increasing day by day.

According to recent soundness of Bank Bangladesh ranked lowest among South east Asian

countries (Hossain, 2019). Some of the reasons for the troubles in the industry are:

Non-performing loans (NPL): According to ‘Finance ministry can't avoid responsibility for

banking sector woes’ (2018) in Bangladesh the default loan account for in state-owned commercial

banks 32% of their total outstanding loan. “This is highly unusual -- no country can run the banking

4
sector with 32 percent bad loans.”-said to The Daily Star; Khondkhar Ibrahim Khaled, former

deputy governor of Bangladesh Bank. According to ‘Managing the banking sector fault lines’

(2017) the amount of non-performing loan is increasing in an alarming rate. The high NPL ratio

diminishes the overall credit quality of the banking sector in Bangladesh. Considering the

underdevelopment of the capital market in Bangladesh, the private sector relies heavily on

commercial banks to raise internal savings and provide funding to businesses and investors.

Looking at the NPL level as a percentage of total loans, we can see that since 2015, the rate of

NPLs on wards has had an incessant annual uptrend. This is an indicator of banks ' deteriorating

rate of asset recovery that has had an overall negative effect on the economy's liquidity and supply

of money. The main reason for the rising trend of the NPL is poor governance at both the private

and government levels.

5
Political Influence: According to the survey result conducted on the article "Present Crisis of the

Banking Industry of Bangladesh: Causes and Remedial Measures" by MD. Habibur Rahman

almost all the respondents identified that the political influence is the top most cause to the present

crisis of the banking industry of Bangladesh (Habibur Rahman, 2018). They highlighted the

present crisis in banking industry as a long-run outcome of the political influence in this sector

(Habibur Rahman, 2018). Some of the ways of influence included: giving license of new banks in

political perspective, appointment of board of directors, priority of political identity during loan

sanctioning, giving special facilities in loan recovery/restructuring/rescheduling to politically

affiliated defaulters, lack of tendency of remarkable punishment to them etc.

Lack of following proper guidelines in case of loan sanctioning and disbursement: The poor

quality of loan investments of banks was intensified by the shortage of enough collateral, poor

quality of collateral assets, application of proper credit appraisal systems, unskilled manpower,

lack of proper sources of credit information, etc. (Habibur Rahman, 2018). “Because many large

defaulters are becoming able to remove their name from defaulter‟s list using the various

mechanisms. Recently said a managing director of a public bank keeping him anonymous).”

(Source: The Daily Jugantor, 08.03.18). What this means is that a defaulter of one bank can easily

take a loan from another bank.

Lack of sound monitoring of the loan: As a result of unethical practices, nepotism, the political

affiliation of borrowers, lack of proper training, etc. there has been an inadequate level of proper

monitoring of loans (Habibur Rahman, 2018).

Decline in the deposit reserve amount of banks: Commercial bank deposit rates have shown a

declining trend in recent years. In 2018, the Bangladesh Banks Association (BAB) settled on a 6

6
percent interest rate on deposits. As the risk-adjusted return was considered to be small by

depositors, this has limited the deposit flow within the banking system (Prottasha, 2019).

Fluctuating Advance Deposit Ratio: A fluctuating ADR shows banks are inefficient in handling

liquidity. It also indicates that the legislative liquidity ratio fluctuates. In addition, since 2017, we

can see an uptrend in the AD ratio that can be attributed by the central bank to the latest CRR

strategy (Prottasha, 2019).

7
Unethical practices/corruption: According to the respondent of a questionnaire from the research

paper "Present Crisis of the Banking Industry of Bangladesh: Causes and Remedial Measures" by

MD. Habibur Rahman, unethical practices have been one of the main obstacles of our banking

sector and one of the prime causes of non-performing loans.

Lack of advanced technological use: Compared to the rest of the world our banking sector is still

in a backward position when it comes to utilizing modern technology. That’s why we were not

able to protect our central bank’s reserve from being hacked because of the outdated security

system.

Unstable capital market: Banks aren't able to collect funds from the market because of

Bangladesh's weak capital market. On the other hand, they are not becoming able to invest in this

market on a large scale (Habibur Rahman, 2018).

Excess number of banks in Bangladesh: There are currently 59 scheduled banks in Bangladesh.

Experts and many respondents from MD. Habibur Rahman’s research paper " Present Crisis of the

Banking Industry of Bangladesh: Causes and Remedial Measures.", considered this volume a

waste for Bangladesh's economy. The current aggressive banking problem was also identified as

one of the negative results of the excessive number of banks in this economy (Habibur Rahman,

2018).

Low remittance: Because of the RMG product's export decline, our remittance income isn't that

good. Also, most of our remittances do not use formal networks. That's why the pressure was

generated in the dollar price which has further exacerbated the banks ' liquidity crisis (Habibur

Rahman, 2018).

8
Lack of confidence of general people on banks: Several government organizations are creating

pressure to withdraw their funds from private commercial banks because of several recent scandals

in the banking industry such as the very recent failure of Farmer's Bank to pay the tk508 crore of

the environmental funds. Generals often lose their confidence in the banking industry and

withdraw their deposits from private commercial banks (The Dhaka Tribune, 2018).

Recommendations

➢ Strengthening internal monitoring and control systems of banks

➢ Formulation of policies to allow bank officials to recover their loans and punish them in the

event of failure

➢ Ensure working capital before the disbursement of loans and, if applicable, to amend the

guidelines

➢ Establishment of data disaster recovery site outside of Dhaka

➢ Monitoring the activities of the board of directors

➢ Banks must ensure that they satisfy the consumer by using technology as quickly as

possible

➢ Formation of separate bench in High Court for quick resolution of the cases related to

banking sector

Conclusion

The problems and crisis in the industry is increasing day by day and increasing interest rates on

loans is a barrier to the expansion of the economy. Inability to expand our economy will result in

our export income to decrease, unemployment to intensify, and current GDP growth rate to

deteriorate. the Government, Bangladesh Bank, The Ministry of Finance of Bangladesh should

9
formulate short, medium, and long-term strategies for coming out of this present crisis situation as

well as ensuring a sustainable development in the banking sector of Bangladesh.

References
Habibur Rahman, M. (2018). Present Crisis of the Banking Industry of Bangladesh: Causes and Remedial
Measures. IOSR Journal Of Business And Management (IOSR-JBM), 20(4), 13-21. doi: 10.9790/487X-
2004021321
Hossain, I. (2019). Bangladesh lowest in bank soundness in S Asia. The Dhaka Tribune. Retrieved from
https://www.dhakatribune.com/business/banks/2019/10/23/bangladesh-lowest-in-bank-soundness-in-s-
asia
Prottasha, M. (2019). Banking Sector: Turbulence in Disguise - LightCastle Partners. Retrieved from
https://www.lightcastlebd.com/insights/2019/10/17/banking-sector-turbulence-in-disguise
The Dhaka Tribune. (2018). TIB concerned over Farmers Bank’s failure to refund climate fund,
depositors’ money. Retrieved from https://www.dhakatribune.com/business/banks/2018/01/08/tib-
concerned-farmers-banks-failure-refund-climate-fund-depositors-money
Challenges facing the banking sector. (2015, December 06). Retrieved from
http://old.thefinancialexpress-bd.com/2014/01/21/14753
Mahmood, M. (2019, April 27). The current state of the banking industry in Bangladesh. The Financial
Express. Retrieved from https://thefinancialexpress.com.bd/views/views/the-current-state-of-the-banking-
industry-in-bangladesh-1556380055
Alo, J. N. 2017, “Finance ministry can't avoid responsibility for banking sector woes‟, The Daily Star, 31
December, P. B4.
Biwas, H. 2018, “Rastaotto bank ar khelapi rin niye gabir udbyk‟, The Daily Jugantor, 8 March, p.1.
Jamaluddin, S. (2017). Mounting non-performing loans. The Financial Express. Retrieved from
https://thefinancialexpress.com.bd/views/mounting-non-performing-loans-1511799809
Research Department, 2017, “Field Survey Report of Study on Credit Risk arising in the Banks from
Loans Sanctioned against Inadequate Collateral‟, Bangladesh Bank, p. 17-27.
Zaman,F., &Chowdhury, P. (2012). Technology Driven Banking in Bangladesh: Present status, Future
Prospects and Challenges. BUP JOURNAL, 1(1), 56-78.

10