AN ANALYSIS OF DIFFERENT BUDGETARY SYSTEMS

PREVAILING IN BANGLADESH: A CASE STUDY OF

BANKING SECTOR

Prepared by

Kazi Naeema Binte Faruky Kanij Fahmida

Assistant Professor Lecturer

Department of Accounting
Bangladesh University of Business & Technology (BUBT)
© 2003 The McGraw-Hill Companies, Inc. All rights reserved.
 INTRODUCTION
• Budgeting is the technique of expressing, largely in
financial terms, of management’s plans for operating and
financing the enterprise during a specific period.

• Effective budgeting system aids managers in planning,

communicating, coordinating, controlling and evaluating the
efforts of the employees.

• Very few studies are available about the budgetary system

of different organizations in Bangladesh.

• This study attempts to unveil the picture of the budgetary

system in banking sector of Bangladesh.
 INTRODUCTION (Contd.)

• In Bangladesh, banking sector is one of the most rapidly

growing industries.

• As per the Dhaka Stock Exchange’s Report 2006, this

sector holds highest share (52 %) of the total market
capitalization.

• Banks of varied nature and ownership status are operating

in Bangladesh. So their budgetary systems also differ.
 OBJECTIVE OF THE STUDY

To critically analyse different budgetary systems

prevailing in banking sector in Bangladesh.

Major Focus on:

i. The present status of budgetary system.
ii.The performance of budgetary system.
iii.The problems and prospects of present
budgetary system.
 METHODOLOGY OF THE STUDY

• Research Type: Descriptive.

• Time of the Study: June to August, 2006.

• Source of Primary Data: Spot interview through a

questionnaire.
• Source of Secondary Data: Different journals and reports.

• Sample Size: Ten scheduled banks in Bangladesh.

 METHODOLOGY OF THE STUDY (contd.): The Sample Units

Name Nature Ownership

Status
1. Sonali Bank Traditional National
2. Agrani Bank &Commercial
3. Bangladesh Krishi Bank Traditional National
&Specialized
4. South-East Bank Ltd. Traditional& Private
5. IFIC Bank Ltd. Commercial
6. Prime Bank Ltd.
7. Standard Chartered Bank Ltd. Traditional Foreign
8. Hong Kong Shanghai Banking Corporation &Commercial
(HSBC) Ltd.
9. Commercial Bank of Ceylon (CBC) Ltd.
10. Islami Bank Bangladesh Ltd. Islamic & Private
Commercial
 CONCEPTUAL FRAMEWORK OF THE STUDY

Budgetary System: The whole process of preparing and implementing

budgets.
Key Elements for Preparing a Budget: As per the
opinion of Nobes and Parker
(2002):

(a) The Budget Objectives: May be financial or nonfinancial.

(b) The Budget Period: May be of short or long range.

(c) The Budget Setting Process: Should be formal.

(d) The Participators of the Budget Process: May be from the top level or all
relevant levels of management.

Implementation of Budgets: After preparation, budgets should be

communicated and made activated.
CONCEPTUAL FRAMEWORK OF THE STUDY (contd.)

Structure of Banking Sector in Bangladesh

Scheduled Banks (48) Non Scheduled Banks (04)

Local Banks Foreign Commercial Banks

(39) (09)

a. Nationalized Commercial Banks (04 )

b. Nationalized Specialized Banks (05)

c. Private Commercial Banks (30)

[Source: Bangladesh Economic Review 2005-2006]

CONCEPTUAL FRAMEWORK OF THE STUDY (Contd.)

Nature of Banking System in Bangladesh

Interest Based Banking Islamic Shariah Based

System Banking System

[Source: Bangladesh Economic Review 2005-2006]

 CONCEPTUAL FRAMEWORK OF THE STUDY (Contd.)

Overall Performance of the Banking Sector

Particulars 2003 2004

1. Return on Asset (%) 0.5 0.7

2. Return on Equity (%) 9.8 13.0

3. Non- performing loan to total loan (%) 22.1 17.6

4. Capital Adequacy (Capital to Risk Weighted Asset) (%) 8.4 8.7

Source: Bangladesh Bank Annual Report

CONCEPTUAL FRAMEWORK OF THE STUDY (Contd.)
Performance of Banking Sector: According to the Ownership Status

PARTICULARS NCBs NSBs PCBs FCBs

No. of Branches 3386 1342 1643 41

Share of industry asset (%) 41.7 10.2 40.8 7.3

Share of deposit (%) 46.0 5.5 41.1 7.4

Return on Equity (%) -5.3 -2.1 19.5 22.5

Gross Non- performing Loan to Total Loan (%) 25.3 42.9 8.5 1.5

[without adjustment for provision]

Source: i .Bangladesh Bank Annual Report 2004;
ii. Activities of Banks and Financial Institutions,2005-2006,( Ministry of Finance, Govt. of Bangladesh)
 CONCEPTUAL FRAMEWORK OF THE STUDY (contd.)

Budgetary System in Banks:

• Performance budgeting in case of a bank implies preparation of a

blueprint of its intention to convert the existing or perceived business
potentialities and possibilities into actual business (deposits, advances
etc) with specified sets of strategies within a given period. (Maheshwari 2001)

• While making the plans six management areas should be considered for
a comprehensive analysis of the current and future shape of a bank, which
are: Risk asset management, liability management, fee income
management, technical and advisory service productivity, management
information system and loan administration, personnel management and
organizational structure. (Naughton et al in Ali 2003)

• To meet the challenges due to globalisation local banks in Bangladesh

must have long term planning with the intention to improve total quality
management of the banks, to provide just in time services and to achieve
customer satisfaction and profitability. (Ali 2003)
 FINDINGS AND ANALYSIS OF THE STUDY

(I) Budget Preparation : Obligation for Budgeting :

• Banks have no direct legal obligation for preparing

budgets.

• The performance of the banks operating in Bangladesh are

evaluated by Bangladesh Bank under the CAMEL (Capital,
Asset , Management, Earning and Liquidity ) rating system.

• As per this system a bank is considered to be efficiently

managed if it has a good planning structure.
FINDINGS AND ANALYSIS OF THE STUDY (contd.)

(I) Budget Preparation: Objectives of Budgeting :

Financial Objectives Non-Financial Objectives

• Increasing revenue • Securing better score in CAMEL

• Controlling expenditure rating;

• Optimizing liquidity; etc • Increasing customer satisfaction;

• Controlling the activities of
employees; etc
 FINDINGS AND ANALYSIS OF THE STUDY (contd.)
(I) Budget Preparation: Types of Budget :

Categories of Banks NCBs NSBs PCBs FCBs Islami

Types Of Budgets

Budget for more than five years No No No No No

Budget more than one year but less than five No No No Yes No

years

Annual capital expenditure budget Yes Yes Yes Yes Yes

Annual budget for revenue income & revenue Yes Yes Yes Yes Yes

expenditure
 FINDINGS AND ANALYSIS OF THE STUDY (contd.)

(I) Budget Preparation: Time of Starting Budget Preparation

Nationalized Commercial Banks Six months before the accounting period

Nationalized Specialized Banks Six months before the accounting period

Private Commercial Banks Three to four months before the accounting period

Foreign Commercial Banks Three to four months before the accounting period

Islami Bank Two months before the accounting period

Accounting Period for NSBs: Financial year

Accounting Period for other Banks: English calendar year
 FINDINGS AND ANALYSIS OF THE STUDY (contd.)
(I) Budget Preparation: Factors :

Internal Factors External Factors

1. Goals and Objective 1.Central Bank Requirement

2. Past actual performance
4. Employee efficiency
5. Resources available etc.
2.Government Policy
3.Customer
4.Competitors
5. Inflation Rate
6.Area Potentiality of Branch
7. New Business Exposure
8. Political Situation etc.
FINDINGS AND ANALYSIS OF THE STUDY (contd.)

Steps in Preparation of Budget in Nationalized Banks

 FINDINGS AND ANALYSIS OF THE STUDY (contd.)

Steps in Preparation of Budget in Local Private Commercial Banks

 FINDINGS AND ANALYSIS OF THE STUDY (contd.)

Steps in Preparation of Budget in Foreign Commercial Banks

FINDINGS AND ANALYSIS OF THE STUDY (contd.)

Steps in Preparation of Budget in Islami Bank

Preparing budget and getting approval from the Board of Directors

Getting views from the Management Committee and Executive

Committee.

Justifying data on the basis of various factors

Collecting data from different divisions or departments of head office by

the Budget and Expenditure Control Division.
 FINDINGS AND ANALYSIS OF THE STUDY (contd.)

(ii) Budget Implementation:

Communication of the Budget:

Individual branch budgets are send from the head office to the branches after
final approval.

Evaluation of Budgetary Performance:

•Branches of the banks send a copy of monthly actual performance to the head
office.

•Budgetary targets of a month are reviewed comparing with the actual

performance by the head office.

• Banks (such as: Commercial Bank of Ceylon) having fully computerized database
system, can review their budgetary performance more frequently.
FINDINGS AND ANALYSIS OF THE STUDY (contd.)

(ii) Budget Implementation (contd.) :

Revision of Budget :

• Most of the sample banks have a provision for revising their

budgets after six months of the starting of actual operation.
• Banks (such as: Bangladesh Krishi Bank) having manual
accounting system face difficulties in revising budget at the time of
need.
FINDINGS AND ANALYSIS OF THE STUDY (contd.)

(iii) Budgetary Performance:

• Almost all the banks claim an achievement of 90% to 100% of
budgetary target, although none of the banks has provided data in
support of the claim.

• Incentives are given to individuals or branches for good

performance.

• For poor performance, responsible persons are asked to clarify

the reasons.

• If the clarification is not satisfactory, an audit may be

arranged.
FINDINGS AND ANALYSIS OF THE STUDY (contd.)

(iv) Flaws in Budgetary System of Sample Banks:

• Local banks do not prepare long range budget.

• Most of the banks do not maintain short time break-ups in the annual
budget.
• There is a lack of budget for research and development, human
resources.
FINDINGS AND ANALYSIS OF THE STUDY (contd.)

(v) Obstacles in Budgetary System of Sample Banks:

•Inconsistent Government policy

•Effect of Globalization
•Interference of Collective Bargaining Agency (CBA)
•Time Constraints
•Lack of Technology etc.
CONCLUSION AND RECOMMENDATION

• Local banks have limited concern in their budgets about the

long run perspective of business in the global context.

•Some factors hampers smooth preparation and

implementation of budgets in banks.

• Present budgetary system in the banking sector of

Bangladesh (specially in the local ones) may be proved futile
in discharging their greater responsibilities for the sustainable
socio-economic development of the country in the long run
rather supportive in achieving the short term objectives of the
banks.
 CONCLUSION AND RECOMMENDATION
Recommendations:
•Banks should prepare long-run budgets to play a positive role to the
country’s economy.
• For effective implementation and better evaluation, there may be small
time break-ups (daily, monthly, or quarterly) in the annual budgets.

•Banks need to have a computer based Management Information System

(MIS) to prepare a realistic budget in time.

•Special focus should be given on the areas like: stuck-up loans, human
resources, research and development etc.

•Government policies should be clear and consistent, otherwise long-

term budget preparation will be troubled in banks.
THANK YOU