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FACTORS AFFECTING THE GLOBAL TREND OF BANK SERVICES: COMMENT ON BANGLADESH S. I. Nusrat A.

Chaudhury Associate Professor Mahmud Zubayer Assistant Professor Mamunur Rashid Senior Lecturer East West University 43 Mohakhali C/A Dhaka 1212 Corresponding e-mail: mamun@ewubd.edu Published in Southeast University Journal of Business Studies, 4(1) Abstract Services are windows to reach customers and these are continuously changing with the changing needs of the customers. Banking services contribute significantly to the nations GDP and employment. On an average ninety percent GDP of the financial sector in Bangladesh comes from the banking industry that is primarily result of effective mobilization of deposit and deployment of credit in different forms. Banking job has been treated as one of the lucrative career options with an increasing percentage of HR added every year (BBS Survey of Labor Force, 1995-2003). However, this sector is experiencing a substantial period of unsteadiness as the outside forces change with respect to globalization, deregulation, merger and acquisition, universal banking movement, technological development etc. Since banking is a service oriented global financial industry, bankers need to concentrate on these factors, which reshape the trend of service development. This report entails to find out the factors, that closely affect the innovative development of banking services at present and those are expected to control the pace of the service development in future, from a global perspective. This review report recognizes the importance of banking service development, its dimensions, strengths and weaknesses for Bangladesh and also identifies international initiatives that might be applied to banking sector in Bangladesh. Key Words: Technology, Relationship, Globalization, Banking Services.

1.0 Introduction Financial market transfers the fund from the surplus unit to deficit unit through an effective intermediation mechanism using financial intermediaries i.e. banks, in the form of accepting deposits and deploying credits. Through out the centuries of trust, bankers have successfully installed the ideas of satisfaction inside the mind of the people which, is truly reflected by the ratio between percentage of GDP coming from the financial intermediation and solely from banking industry. 90% of the GDP of financial sector is contributed by the banking industry in Bangladesh (Ashraf & Howlader, 2005, pp. 30). Employment in this field has been increasing successfully over the years from 1996 to 2003, which was, 0.57% of total employment in 1996 and 0.68% in 2003 (Labor Force Survey, Bangladesh Bureau of Statistics, 1995-96, 1999-00 & 2002-03). Gradually, because of its market oriented updated services with supported care for the target group with a view of creating economic value, banking is now treated as an essential industry (Rose, 2002). As the competition increases, banks are trying to be modern with customer friendly services having more strategic view in mind for specific kind of customer located in different geographic locations (Howcroft & Durkin, 2003). Through this intermediation of fund from surplus to deficit units, banking is assisting in countrys resources allocation into productive deployment (Ashraf & Howlader, 2005, pp. 67). Therefore this intermediation will be winning if the bankers are successful to attract the attention of the people presenting the appropriate value to their investment. The modern intermediation process will be differentiated on the basis of how the market reacts to it (Santomero & Eckles, October 2000). And to make this intermediation successful, bankers need to understand the factors those affect the psychology and operational behavior of the market and its elements. That is how the importance of global factors such as technology, deregulation, cross-pillar activity (universal banking), merger and consolidation, globalization of markets, diversity of demographics etc. come into action. 1.1 Modern Bank Services and Its Dimensions Banks are not dying because of its intermediation and payment services (Rose, 2002). Rose (2002) added that modern banking creates convenience through locational competitiveness and technological implications. Banking services are now so diverse that is sufficient enough to satisfy all the financial needs of the customers. All financial services under single-roof-psychology is pressuring to change the name; commercial banks to Universal Banks (Santomero, Eckles October 2000). Abdullah A. Noman (2005) described the base of modern banking service development as the combination of three factors; (1) Financial, (2) Relationship enhancement and (3) Market performance. Reddy (2005) analyzed the importance of modern banking services from a social view point. He considered the social responsibility of the banker on the top of all factors. Task Force Report on Banking sector reform, Bangladesh (1999) established a cause and affect relationship between the modern banking services and the development and smooth operation of the banking sector in any developing country especially for Bangladesh. As a brain of the economy, modern banks must ensure the intrinsic and extrinsic development of the economy (Mohan, 2005). And to do this, financial services have to be modern.

A conceptual model of dimensions of service development is shown below. Diagram 01: A Conceptual Model of Service Dimensions in Banks Technological Implication (Reduce cost, creation of convenience) Financial Innovation (Efficiency and Crosspillar Product) Marketing Magic (Customer satisfaction and service delivery method)

Socio-Economic Value Creation (Social Responsibility and Financing the investment of productive resources) 1.2 Common Bank Services and Strategy of the Bankers Bank services are the bearer of its profitability and liquidity (Rose, 2002). Beyond the bottom line of any business, profitability, bakers are also liable to build up the society since it is well known as a socio-economic organization (Mohan, 2005 and Reddy, 2005). Therefore the services should be developed keeping in mind that it is serving both profitability and social responsibility functions. Bank, as an intermediary, earns most of the profits from loan products it offers and also earns some fees and service charges from other fiduciary services. Deposit is the biggest source of cost. The nominal difference between interest income and interest expense is the margin for intermediation. As a bank manager, one must have the objective in mind to increase this margin. So the services should be offered such a way that increases the interest income from loans and minimizes the cost of deposit to an optimum level with an increased customer satisfaction, and that is how it becomes the most important financial institution and most important among the service sector companies as well (Tore and Veronica, 1994). Statements, from Tore and Veronica (1994), Berger and Humphrey (1992), Frexias and Rochet (1997), Alan Greenspan (2003), Barnard Barnanke (1983), Boot and Thakor (1996) and many more, are same with respect to banks responsibility of social welfare, economic stabilization, capital management, risk management, customer financial service management and many more by fulfilling the business bottom line. Its increasing importance can be shown by the following table (table 01) which was surveyed by Fortune Global 500 having a comparison of the 1991s and 1998s Service and Financial sector companies: Table 01: Global Service Sector Statistics Service sector share 1991 Service sector share 1998 All data are in % Numb Reve Prof Number Reven Profit er nue it ue Diversified service companies 13.4 30.0 8.6 20.2 20.0 7.2 Insurance companies 4.2 5.2 15.4 10.8 10.9 10.8 Transportation 5.8 7.6 -1.3 2.4 1.9 2.1 Utilities 5.8 7.6 8.7 7.6 7.3 12.2 Banks 12.0 17.3 21.6 13.6 10.9 10.9 Total for Service Sector 41.2 67.8 53.0 54.6 51.0 43.2 Source: Fortune, various editions It also indicates the increase in proportionate coverage of financial services and possible opportunities for the banking services to be more attractive and society

oriented and profitable. What kind of deposit or loan products or any other services banks will be providing, will be depending on many different factors. And these factors which affect the service development and changing the trend of services in the current global context are our main consideration of this review research. Presently common bank services are affected by globalization, technological advancement, educated customer society with diverse financial requirement and many more (Hussain, 2004 and Ferguson, 1998). While explaining about the type of modern banking services offered by Indian Banks, Mr. Y. V. Reddy, the Chairman of Reserve Bank of India in a Seminar in 2005 argued that the future bank services will not be limited to specific groups or locality. He added that bank services will form a retail-wholesale niche combination and services will be offered not only on the basis of customer demographics but also on an open regulatory framework basis. He suggested the managers to add value to the economy not only by offering commercial services but also by being social benefactor considering both globalization and financial infrastructure and superstructure available locally and internationally. He hopes that the development of technology through out India will be available so that all types of people get the chance to get into the biggest financial stream. Among different deposit services, saving deposits, current or demand deposits, time or fixed deposits are in the top of the list. Recent examples show that bankers are concentrating on niche collection of deposit from small individuals or shop keepers. Banks are pretending to collect fund through DPS, Student Account, Super Market Savings, Youth Saving Program, Old Age Saving Scheme, Household Saving Scheme etc. Everyday newer names are added to the types of deposits. But while making deposit portfolio decision, banks make a trade off between the stability and cost (Ashraf and Howlader, 2005). Banks loan products are created out of different tastes. Different types of customers are entertained with different kinds of loan services. From a big corporate client to a single individual, all are captured through modern bank loan services network. The recent trend includes loans for SME, Micro Credit for villagers, Retail loans like Consumer Credit Schemes, technological loans like Credit Cards and many others. But primarily bankers started with long term Industrial Loans in most of the countries with a view to develop the economy or a specific sector. Bankers ultimately choose customer on the basis of (1) ability and (2) willingness to pay loan installments (Peter S. Rose, 2002). 2.0 Research Questions This review research intends to search the answer of the following questions: 1. What global, regional, local trends are affecting the banking services? 2. What are the strengths, weaknesses of, opportunities for and threats to the development of effective banking services in Bangladesh? 3. What are the initiatives might be taken by the concerned authorities to create a room for innovative service development? 2.1 Methodology: Data Collection and Analysis

The review involved four stages of data collection and analysis procedure indicated by Financial Services Cluster Review, Toronto, Canada (February 2001). Stage 1: Reviewing literature available from academic, industry, and seminars, special speeches given by Governors of Central banks and other public sources in either printed or in electronic format including different web issues. Stage 2: Interviewing the industry experts including academicians, bankers and industry representatives. The sample size of the interviewees, which was selected conveniently, was 15 with a response success rate of 93% (14 successful interviews out of 15). Interview was taken either by written questionnaire format by sending the questionnaire to the experts by e-mail (80% approximately) or rest (20%) on telephone conversation. Stage 3: Analysis of the background study to search for the factors affecting the banking service creation and development of banking services and offering them to the customers, and also to find strength, weakness of, opportunity for and threats to the banking sector of Bangladesh. Stage 4: Identifying the possible initiatives that might be taken up by Bangladesh Government to develop banking sector to create innovative banking services. A comparative study is also conducted on the initiatives taken by authorities in other countries and cities to develop their financial service cluster development. Lessons for Bangladesh have been taken from that comparative study. 3.0 Factors Affecting Bank Service Development: Background Study 3.1 Customer Relationship, Competition and Socio-economic Values: Berger and Humprey, (1992); Frexias and Rochet, (1997) described bank as a multi input and output financial firm where the main objective is to give better services to the customers. They argued that the modern approach seeks to keep better relationship with customer by providing quality bank services. Banks are among the most important financial service providing companies in any economy. Therefore, banking services must be rendered to the best interest of the economy. Y.V. Reddy (2005) highlighted this perspective of banking services from a social view point brining in the socioeconomical responsibilities in terms of capital mobilization, poverty reduction, human resource development etc. As the market is becoming increasingly competitive, bankers are now directed to ascertain bank-client relationship for better stable growth of profitability. It is described by many background studies that relationship successfully increases the value of the company through repeat customer mechanism and successful customer retention system (Mohan, 2005; TFSCR, 2001; Reddy, 2004, Tore and Veronica, 1994; Santomero and Eckles, 2000). Relationship differentiates the bank services and separates the bank value from the competitors. Financial sector reform taskforce report Bangladesh (1999) described the importance of competition from relationship perspective while considering new service development in banks. It suggested the bankers need to be competent to handle competition as it is an important normal market phenomenon.

Practice of basic banking, especially Indias strategy, to cover maximum population from diversified geographical location and income groups, has started now. Central banks in developing countries are now pressuring the commercial banks to strengthen their base of banking in the rural areas (Mohan, 2005). Therefore the selection of thirst sector is pressuring the bankers to shape their way of thinking about service development. 3.2 Technology: One of the major requirements to fulfill the social responsibility is to cover the wide range of population scattered in different locations through banking services, so that not only city areas but also the rear rural villages can be also taken under greater financial development stream. Technology can make that possible with ICT facilities to bank branches connected to Global ICT Network. Technology becomes important not only for covering huge population, it is also important as a less costly channel of distribution of financial services which has impact on profitability as well (Santomero and Eckles, 2000; Barnanke, 1983; Moriotti, 1993; Mendis, 2004; TFSCR*, 2001). Recent development in e-innovations and financial technologies have advanced the conventional thinking of the banking industry onto modern, extrovert, globalized version of banking. With the use of massive IT developments, bankers are now efficient to handle complex data management, faster client service, customizing relationship, strengthening services to newer customer base and furthermore to eliminate paper works, better scheduling of logistical facilities for overall setting up of competitive advantages (Fukui, 2005; Udeshi, 2003). Most of channels, such as branches, call centers, ATMs, Credit and Debit Cards etc., through which bankers render their services to customers are technology supported, therefore technology becomes one of the biggest indicators of how services will be formed and what is the destination of the bank (M2 Communication survey, 2003). Review of the financial technology development can be cited from Santomero and Eckles (2000) explanations: Examples of potential gains from financial technology development include physical branch network, infrastructure software, electronic distribution system where marginal costs are negligible, and some niche processing businesses in which value is a dominant success factor. Greater customer knowledge means lower monitoring cost and information can be better handled by technology than any other mechanisms. 3.3 Idea of Risk Management Strategy: Berger and Humprey, (1992); Frexias and Rochet, (1997); Ferguson (1998) and Reddy (2005) tinted risk management perspective important while introducing new services. The summary of their reports shows that one of the major aspects in service development is to create and offer service of such kind that fulfills the customer demand and helps to reduce risk of different types. They also pointed out that the prerequisite of this perspective that bank must understand its target customer very carefully. Introduction of derivative services are the result of thinking in easy risk management solution in finance (Santomero and Eckles, 2000). 3.4 Deregulation:

Y.V. Reddy (2005) described deregulation as one of the major factors that is helping to expand Indias banking sector. He said that too-much of regulations were limiting the growth and restricting the choice of the customers (2005). Since banking is a customer oriented business, customers must be given the regulatory support to think about the better way of living. As a result, deregulation was on the top of the list of expectation. As the governments are reducing their level of control on the financial activities, the size, shape and the areas of banking activities are changing all over the world. 3.5 Universal Banking and the Idea of Cross-pillar Activity: The idea of convergence or cross pillar activity was primarily highly practiced in Germany with the introduction of Universal banking in which under one single roof, all the banking needs are taken care of. Cross pillar strategies allow a company to gain economies of scale, to access a wider market, cross-sell and deliver a wider range of products and even enhance product innovation capabilities (TFSCR, 2001). Shamshad Akhter, Governor of State bank of Pakistan (2006) described the mechanism of universal banking and its importance in banking in terms of competition in banking services and also from building relationship with customer base. The report was presented in a seminar which aggregates the benefits of Universal banking with proven priority to customer demand in banking. Mergers and acquisitions are taking place at an astounding rate within industries, which comprise the banking sector as well. The case of Standard Chartered Bank and ANZ Grindlays is one of the perfect examples for many South-Asian bankers, which opens the opportunity for providing wide range of customer friendly services considering the diversity of customers from two different banks. 3.6 Globalization: The top 8 banks in the world are each worth as much or more than all of the Canadian Bank as a whole (Merill Lynch, 2000). Through consolidation and mergers in different formats, banking industry is now a global financial village. Even without setting up of subsidiaries in different countries, bankers are managing the international trades, through LC mechanisms by having thousands of foreign correspondents and agents. Adoption of new technology has made the whole world close to each other and this easy access to global financial services increases the demand of the customer for better and newer services to fulfill their expectations. Companies with inadequate resource are forming strategic alliances with local big companies in different countries, which gives them the opportunity of entering into new market. This idea of getting onto one-singlepie is creating newer angles in service developments in banking services. That is how the economic integration changes the way the banking services should be developed.Toronto Financial Service Cluster Review (2001) describes globalization as it has let to a highly interdependent international market vulnerable to serious global financial ripple effects. The review says that the availability of information for virtually 24hrs everyday is creating further threat among international markets and the deregulation along with regional cooperative movements have further opened up the door of creative and challenging financial needs of the customers. Now customer wants a globalized financial product rather than banking services which merely take care of deposit interest payment or a convenience through loan facility.

3.7 Changes in Demographics and Customer Education: People always like to change to better options and as they are changing with their demands, the supplier will also have to change their strategies. Income-expense pattern, CPI, GNI etc have been changing rapidly worldwide. This affects the saving patter of the people and also affects the ability to invest in productive resources as well. The age limit, population study, mortality rate have been different in different geographic locations, banking services including saving plans, insurance programs are becoming different for catering to the need of the customers. 4.0 Analysis and Review 4.1 (Table 02): Ranking of the Top 10 Factors that are Relevant to Development of Bank Services in Bangladesh: Industry Response Rank 1 2 3 Factors Technology Education Customer Demography Competition, Niche, Religious importance Relationship Retail-Wholesale Formation Cross Pillar Activity Deregulation Response*1 100 96 93 Important Issues Reduce cost, increase coverage & profit, financial engineering. Access to internet, newspaper, seminars, advertisements, satellite Income-expense ratio, CPI, Mortality rate Islamic branches, Services for Professional, services categorization according to ages (Old, Young, student accounts), SME Client relationship, customer service department, Post Service Relationship Corporate service, Retail banking, Corporate Salary Account, Priority Banking, SME, Syndicated Loan. Insurance, Leasing, Underwriting. Flexibility of regulations in credit disbursement and designing deposit products. City beautification project, student scholarship, Lower rate Loan for women,

92

5 6 7 8

85 84 75 70

Social Responsibility & 9 62 development issues Area wise Rural vs. urban banking, micro credit to 10 57% classification villagers, Infrastructure development *1 Total percentage is more than 100 because of multiple answers chosen by the respondents. The above ranking has been done on the basis of simple weighted average percentage opinion of the industry experts, high level bank officials and academicians (total sample number was 14). Technology has been selected as the most important and powerful factor that will obviously change the way of service development in future. Please note

that there were other factors identified by the interviewees, but only the top ten factors have been identified for this report for further analysis. On the basis of the factors selected and important issues related to every factor, analysis of SWOT is shown in the following part for Bangladesh. [see Table: 2] 5.2 Findings: SWOT Analysis for Bangladesh 5.2.1 Technology: Bangladesh Institute of Bank Management (BIBM) in its survey on ICT in Bank Branches (2001) shows that only 19% of the Nationalized Commercial banks and 38% of the Private Commercial Banks have backbone of ICT facilities. Opposite to this, Foreign Commercial banks are 100% supported with ICT infrastructure. Latest technology initiatives in Bangladesh include; installment of huge capacity software and hardware for overall processing of banking activities, Automatic Teller Machine (ATM), Credit and Debit Card, global online fund transfer, Database management, anyplace-anytime connectivity, any-branch banking etc. Bangladesh started its journey toward upgraded version of technological infrastructural development through submarine cable, even though it is too late and it will take another few years. VOIP (Voice Over Internet Protocol) has been unleashed, but without specific direction, in a seminar by the last Govt. Only city headquarters like Dhaka, Chittagong, Sylhet are currently under strong IT control. Unfortunately a big area is uncovered. Due to the lack of IT infrastructure, much of upgraded and less costly banking solutions are not present to the rural and sub-urban areas of the country. Absence of IT facilities is demotivating bankers to open branches in the rural areas because most of the modern services could not be provided and bank will not be able to cover its economies of scale. The opportunity is that if technology coverage is there, mass people will be under banking coverage and reaching them with modern banking services will be possible. So, problem for banking technology in Bangladesh is basically limitation of IT infrastructure. 5.2.2 Education: Educated people are rational investors (Mohan, 2005). As the countrys education structure and standard start to develop, people have the access to modern learning. Education Watch Report, Bangladesh (2004) says that approximately 50% of the Bangladeshis can write their name. Though there is no clear record of what is the actual level of properly educated people and percentage of population belongs to that group, it is clear that country education status is overstated. Even though the Govt. has the highest budgetary allocation for education, recent government decisions regarding Madrasha Education and Ekmukhi Shikha have noted significant protest. But both qualitative and quantitative changes have been observed in the education industries in the recent past. The credit goes to the fifty private universities, thousands of kindergartens, village schools established by NGOs, local and international training programs etc. The people are also learning about new generation banking cultures from satellite channels and Internet facilities and looking for such banking services to fulfill their needs. Bankers are also changing their strategies to introduce services according to the need and demand of the customers. Education is significantly changing the demographics of the people like the income range and therefore the buying capacity of the people. Education changes peoples attitude towards banking services. The middle

class family is the future of banking sector of Bangladesh, which is educated and live a financially solvent life. This group is fairly increasing in this country. One pertinent question in this connection is that whether we have enough facility to train and educate our banking professionals. Bangladesh Institute of Bank Management (BIBM) is the most reputed professional institute of the country where banking graduates are born but in a limited number. This organization organizes most of the implicative training programs. In the year of 2004, a new department was created in the name of The Department of Banking under the faculty of Business of Studies of the University of Dhaka. Some private universities are also coming up with their Master of Bank Management (MBM) programs, but the quality is questionable. So, better educational infrastructure, not only for the customers but also for the bankers, might change the way of bankers thinking towards customers demands. 5.2.3 Customer Demography: Major attributes of customer demography are listed below: 1. Due to a high consumption to savings ratio, supply of fund to bank through different deposit products has reduced. 2. Remittance income was one of the biggest incomes in the village areas and it has been transferred to local receiver without government registration mostly through Hundi system. Now, due to strict regulations and absence of banks in remittance-receiving areas, people are coming to city areas, mostly in Dhaka, and opening bank account with any bank. The village women or housewives who used to receive the remittance, has been instructed by the senders (husband in most cases) of remittance to come to city headquarters for better banking and education facilities. By these processes, demands are shifting. Banking services need to be designed to meet up these changing demands. And mostly because of these we are observing most of the banks opening branches in Dhaka, Chittagong and Sylhet. 5.2.4 Competitive Pressure and Identification of Niche: There are near about fifty schedule banks working in Bangladesh with another fifteen (approximately) insurance and leasing companies. Most of the financial and nonfinancial institutions are privately owned and paid great attention towards sustainable service development. This is a perfectly competitive market where private commercial banks have the highest stake in loan disbursement, which grows to 43% in 2004 from 30% in the year 2000. In a perfectly competitive financial market, leaders are chosen on the basis of their effective deployment of resources and efficient ways of satisfying customers (Tore and Veronica, 2004). Nationalized commercial banks are loosing loan market because of ignorance of effective customer management where their share of loan reduced to 39% in the year 2004 from 48% in the year 2000. Foreign Commercial banks have shown their efficient loan management and grabbed a substantial percentage which rose to 7% in 2004 from 5% in the year 2000. Giants nationalized commercial banks are facing competition from deposit collection perspective. Due to lack of customer understanding and inefficient deposit management, their share in deposit reduced by over 20% from the year 2000 to year 2004. Having the same as advantage, private commercial banks did successfully increase their deposit collection from 31% in the year 2000 to 43% in 2004. One of the most important and strategic

areas banks have significant improvement undertaken is the identification of new niches. There are numerous examples available like loan for professionals, Micro credit, Islamic banking branches, students account, Female banking, Home banking, Priority banking and many more. Huge inside competition has forced the bankers to be innovative. Nationalized commercial banks did not build their service strategies considering the competitive risk. Mohan (2005) described competition by relating it to the customers opportunity to choose better services. Therefore higher the competition means higher propensity to switch banks. To be alive in the competition, bankers must redesign their ideas to attract new customers. 5.2.5 Relationship: Most of the private banks and all the foreign banks in Bangladesh have customer service division at individual working units either in branch or in any particular department. Bankers have successfully identified the importance of customer relationship management. Modern banking is different from traditional banking as it talks about customer satisfaction and welcomes the customer to repurchase the service again (Tore and Veronica, 2004). The strongest side of the foreign banks in Bangladesh is that they have successfully established the ideas of customer management inside the mind of the people. While comparing with other banks, they first highlight their ability to create satisfaction, because if the customer is satisfied they will bring new customers and profit as well. Therefore, they are bringing in banking near to customer by offering services in many forms like ATM, phone banking, e-banking and even mobile banking. The ideology in this regard is that customers should not be waiting for the service; rather services should be waiting for the customers to be knocked. Unfortunately this real truth has been absent with nationalized commercial banks. As a result, they are loosing market to private and foreign commercial banks. 5.2.6 Retail-wholesale formation: The Indian experience of bank services shows that their services have been divided into retail (mass customer) and wholesale (corporate) services. As Reddy (2005), Fukui (2005) described the importance of retail financial services that it can cover wide range of services and population. They also supported wholesale financial services for corporate needs, where corporate services help to develop countrys overall resource allocation. Not many banks in Bangladesh, except a few private and the foreign banks, are allocating substantial amount of resources to various areas of retail banking services. Fukui (2005) also pointed out two important sides of retail banking services as he explained that (1) retail banking services can strengthen profitability and (2) it can reduce non-performing loans. For examples, Brac Bank, Eastern Bank, Dhaka Bank, Prime Bank, Standard Chartered Bank, HSBC Bank are molding their service strategies according to the changing retail-wholesale formation of the country. Therefore, lion share of household deposit and personal loans services are offered and grabbed by these banks. On the other hand, strong relationship, with corporate bodies, is enabling these banks to clutch substantial amount of wholesale loans in the way of syndication and deposit accounts in the way of salary accounts etc. But still majority of the banks are not aware of the power of retail-wholesale formation of banking services, which is expected to dominate the banking service industry in the coming decades.

5.2.7 Cross Pillar Activity: Cross Pillar activity is a special kind of services by modern banks where the banks engage into serving different kinds of customers at a time such as the acceptance of deposit, giving loans, opening insurance account for customers, arranging leasing facility etc. The area of cross-pillar activity is very limited in Bangladesh. At present insurance companies, leasing companies and merchant banks handle most of the individual non-bank financial activities. Bankers are also developing these activities in limited scale. For an example, most of the banks, those offer credit card facilities, give an option to their customers to buy some insurance policies as well. Corporate clients, having salary account with any bank, might ask for a lease to purchase car or any other fixed assets. Banks work as an underwriter, in most of the cases which is syndicated underwriting, for their clients by offering share in the market. If cross pillar activity increases, diversification of services will be possible and as a result profitability will increase in the form of fees earning (Banking Reform Committee Report, Bangladesh, 1999). It was a question to one banker, why they are not starting universal banking? The answer was like the following: Are you nuts? We are having problem with normal business, how can we start abnormal business. Bangladesh bank also does not have any specific direction regarding cross pillar activity. However, Banking Reform Committee suggested the Govt. to recommend the banks to start cross pillar activities in a limited format as a start up with a view to diversify the income base (Banking Reform Committee Report, Bangladesh, 1999). One of the major reasons behind not investing much in capital market is that the capital market in Bangladesh is yet unstructured. 5.2.8 Deregulation: Deregulation opens the place for competition (Reddy, 2005). Bangladesh government has started the decomposition process not from a long ago. Since banking is a market oriented business, the quality of the bank should be judged by the customers. Therefore banks have been given legitimate power in every country to create deposit and loan products to attract customers. In Bangladesh, central bank still controls major decisions regarding capital control and reserve requirement. Central bank controls popular issues like the SLR requirement, capital requirement, maximum loan capacity requirement etc. Now bankers can change their target market and can reshape their service policies as well. Likewise, Govt.s decision regarding tax on house owned might influence house construction loan, regulation on investment tax credit might reduce savings in bank etc. Bankers must be careful about these changes for future. 5.2.9 Social Responsibility and Development Issues: Bank is a socially responsible organization and in Bangladesh for last few years, very few banks could successfully clarify the theme of a perfectly socially responsive attitude. Social responsibility controls banks profitability in short-run but it helps to develop the theme of ethics and builds the image of care inside the society. It develops loyalty of the customers to the banks. Both local and multinational banks in Bangladesh are offering scholarship programs for the poor but meritorious students, taking the responsibility of city beautification project from municipal authority, donating different hospitals,

financing social awareness programs against AIDS, Dowry, Acid Attack etc. Banks are also financing women in the village and city areas for self development by providing loans with low rate of interest. In the process of our conversation, one of our interviewees was a Branch Manager of a Multinational Bank. He told us about the impact of social responsibility on services development. In his opinion the sense for social responsibility is not a regulatory requirement but its a social initiative to attract stable customer base. A bank just cannot be run on the basis of its social responsibility, it must seek profitability. Therefore, the tough job is to introduce services that generate stable profit and also create social awareness. 5.2.10 Area Wise Classification: Rural vs. Urban Concentration: As the demands are different in different areas of bank operation i.e. rural or urban, banking services must be also catering to the specific needs of the customers. One of the biggest banks in Bangladesh, Sonali Bank, was established just after the liberation with a view to finance Jute cultivation in the rural areas (Ashraf & Howlader, 2005). Another three big banks, Rupali Bank, Agrani Bank and Janata Bank, were also established and taken under close government supervision to develop rural Bangladesh. All the services in these banks are mostly catered to the needs of the rural areas. Commonly known as Nationalized Commercial Banks (NCBs), these four banks, hold maximum branch coverage in the rural and sub-urban areas, which was on an average 63% over the years 2000 to 2004, whereas private commercial banks have average 25% of their branches in the said areas. Four very famous development financial institutions namely Bangladesh Krishi Bank, Bangladesh Shilpa Bank, Rajshahi Krishi Unnayan Bank, Bangladesh Shilpa Rin Shangstha with newly added one, BASIC (Bank for Small Industries and Commerce), have lion percentage of the rural banking branches those are mainly categorized for their special development activities in agriculture, rural trade, small business finance, remittance collection etc. No foreign banks have branches in the rural areas, where as only Standard Chartered Bank has branch in Bogra, which was established to finance the intra-regional trade zone activities in Bogra, one of the biggest business centers in the northern part of Bangladesh. Unfortunately, due to inefficient target market selection, lack of central governance, geographical diversity, shifting in demographics and low infrastructural development; rural banking has not been a successful one. Despite the doubtful success, few banks are now opening branches in the rural areas, mainly in the headquarters; those are of great financial importance either from remittance perspective or from trade related financing opportunities. The above limitation of the rural banking is absent in urban or city area banking. Banks start its business by opening a branch in the famous areas of Dhaka, Chittagong and Sylhet. Since the type of customers are different in city and urban areas, different types of business opportunities are available and service distribution methods are different; banking services and planning must be different. This factor has been chosen as the least important factor by most of the interviewees, since most of these banks do not have branches in the rural areas. But they notified that these might be serious mistake if bankers ignore this factor for a longer period of time. Some recent initiative includes opening branches in the sub-urban areas, mainly in the district head quarters, by the private banks. 5.3 Summary of SWOT for Bangladesh

Strength 1. Labor pool 2. Private universities 3. Private bank management initiatives

Weakness 1. Limited technological infrastructure. 2. Lack of monitoring of financial activities through a legal framework. 3. Managerial inefficiency of understanding niche and offering appropriate services. 4. Lack of understanding of customer relationship. 5. Lack of proper linkage between supply and demand of financial services. 6. Inefficient capital market. 7. Default culture and asymmetric information.

Opportunities 1. Changing nature of customer education and awareness, employee training etc. Threats 2. Retail financial services are becoming 1. Income disequilibrium. 2. Higher migration rate to city areas and less risky and profitable limited services to rural areas. 3. Cross-pillar activity can add more 3. Instable political condition. value. 4. Growth of employment in home and 4. No planning for service export. abroad is insignificant. The above points show the importance of three distinctive fields given at the beginning of the report; technology, marketing and finance. A banker must have to use the ideas of new technological advancement to create and deliver new services at lowest possible cost, which ensures maximum financial benefit with respect to socio-economical advancement by expanding stable relationship with the customers. 5.4 Findings: Existing Initiatives Different initiatives have been taken to strengthen the banking services industry in different parts of the world. In some countries like the USA or the UK, the banking services industry has been divided in different clusters by different geographical locations. All the areas have their own merits and demerits in offering effective banking services. In the following part, some of these initiatives have been discussed briefly. 5.4.1 Summary of Local Initiatives: SL 1 Area New York Initiatives Tax rebates and rent reductions for bank offices, quality of public safety, promotional activities by Economic Development Corporations, labor force training etc. Tax credit to banks under Enterprise Zone Program, low rents for financial services firm etc. Promotion by British Invisibles (BI) to support financial services industry, alleviating regulatory barriers,

2 3

Stamford, Connecticut London, UK

Leeds, UK

Frankfurt, Germany

Toronto, Canada

increasing awareness, statistical research publications, a single central authority maintains the quality of services etc. Leeds Financial Services Initiatives (LFSI) promotes financial service activities, Leeds Training and Enterprise Council trains the labor force etc. Excessive branding influence, Finanplatz promotes Germany as a financial services headquarter of Europe, www.bankfrut.de provides instant information on services development and coverage etc. Economic Development Strategy establishes synergies of financial services with other related institutions, strategic alliance to promote Torontos Financial Service Industry, searching and developing local talents, awareness building programs, competitive advantage through Business Sustainable Development Method etc.

5.4.2 Initiatives in Bangladesh: Financial Sector Reform Unlike the above countries or areas, there was no successful attempt taken by the Government of Bangladesh to strengthen the service development of the banking industry. Several committees have been formed, but most of the recommendations could not be implemented. Banking Reform Committee (1996), Financial Sector Adjustment Credit (1990), Financial Sector Reform Program (mid 1990s), National Commission on Money Banking and Credit (1986), Structural Adjustment Participatory Review Initiative (2000), CPD Task Force on Financial Sector Reform (2001) were formed in different time period with different motives under Government and private initiatives. Some of the recommendations of these committees are listed below: 1. Reform of NCBs and DFIs to reduce Non Performing Loans, so that rate of interest on loan can be reduced (BRC Report, 1999 & NCMBC, 1986). 2. Establishing strong legal framework with clear-cut guidelines for the bankers and more intensified supervisory system for banks (CPD Task Force Report, 2001). 3. Strengthening the capital market (FSAC World Bank, 1990). 4. Establishing a room for the priority sectors (FSAC World Bank, 1990). 5. Stopping illegal activities of trade unions in banking sector (CPD Task Force Report, 2001). 6. Paying more attention to develop human resources and establishing necessary atmosphere for ICT use in banking services (CPD Task Force Report, 2001). 7. Creating an environment of macroeconomic stability, political commitment and non-interference of the Govt. and vested groups (SAPRI Study, 2000). The above measures and guidelines are necessary for a developing banking industry. Along with these preliminary issues, regulators should also take initiatives to develop banking services and strengthening these in such way that satisfies the customers demand, brings stability and competition in banking industry. 5.4.3 Latest Status of the Financial Service Development in Bangladesh

Two important reform projects have been shut down by political government. There is no new direction initiated by government on this issue formally. However, private sector banks have been trying to develop their own service quality. The initiatives take in this regard are more or less market driven and highly competitive. Nevertheless, the initiative should be integrative from and within the financial system. Establishing a quality financial service sector is the responsibility of banks, stock market authorities, legislators like Ministry of Finance and central bank. At present, most of the private banks have web information and communication facilities to render better services to their customers. They consider market analysis, shifts in demand and economical viability before introducing new services. But discriminations are also present. Only a very few private banks have their sufficient branches in rural areas. Technology is vastly absent in rural areas. Moreover, a very recent case of insecurity regarding the theft of private bank, depositors are highly disheartened. This would hurt the service development in commercial banks. On the top of all, government of Bangladesh should quickly consider a complete legal framework for financial service development. Issues are protection of the customer rights, education and training of the bankers and investors, investment and research in financial services development etc are pertinent. 6.0 Concluding Remarks To develop and sustain a strong banking service sector, individual banks, Central Bank of Bangladesh, Securities and Exchange Commission, Ministry of Finance and other concerned must be working together to achieve a regular, step-by-step and time driven goal. Following initiatives can be suggested on the basis of the background study, industry responses and existing countrywide initiatives. 1. A best-effort committee can be formed having an alliance of the bankers, regulators, industry leaders and researchers. Prime responsibilities of this committee might include reviewing the quality of bank services on a regular basis and establishing Bangladesh as one of the promising areas in the South Asia for business and investment. It should also be responsible for finding and developing Competitive Financial Advantage (CFA) for Bangladesh. 2. Establish effective rules of capital market so that interest of the investors is reflected and major companies of home and abroad become interested to participate. 3. Quality higher education must be ensured through effective and sustainable policies. Every institution, within the above alliance, must have their own training, research and development center and must be organizing local and international workshops and conferences to build human capital. Educational institutes might come up with innovative quizzes or workshops where the students will be assigned responsibilities to initiate services and to sell those to mock customers. Such creative efforts on the part of the educational institution should be promoted and financially supported by the banking industry. 4. National ICT coverage must be ensured within the shortest possible time at an affordable cost.

5. Political interference in the banking industry should be stopped for putting the interest of the country ahead of self interest. 6. A Service Development Division (SDD) can be formed separately or it can be working as a subdivision under the Central Research Cell (CRC) of the banks to ensure creative identification of the banking products rather than just copy the market trend. Banks with wide coverage might open SDD with each of the branches or centrally for each of the departments like deposit, credit and other services.

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