Banking in Bangladesh

2.1.4 Banking in Bangladesh

Since early British rule, the history of banking in Bangladesh territory shows that the traditional trade-networks developed before the banks invaded rural areas. And the banking services have slowly flourished in Bangladesh territory. Even today, in many places, moneylenders provide credit services. Small shopkeepers and businessmen use informal credit at high interest rate (Maloney and Ahmed, 1988: 54). Traditional mahajans’ money lending business gradually declined due to expansion of bank and the micro credit programs of NGOs, cooperative banks and government agencies.
Public Sector Banks
During the liberation was in 1971, the economic, political, and social system including the banking system were severally damaged at that time, all hi a and medium financial institutions except two small banks had their head office in the West Pakistan. The non-Bengali owners and managers of the financial establishments that operated in T7ast Pakistan had abandoned them. After independence’ in 1 971, the now government had to take over management and ownership of all such institutions, The Baths Nationalization Order 1972 was issued to nationalize banks and financial institutions (except those incorporated abroad) in order to control chaos in the field oh ownership, party. Bureaucracy, the intelligentsia, and pressure group. By several orders six nationalized commercial banks (NCBs), one industrial bank (BSB), one agricultural bank (BKB), and one industrial development financial institution (BSRS) were created, the banks and financial institutions, which originated during the Pakistan period and were merged. And renamed and continued their functioning after independence of l3angladesh have teen presented in Table-3. The banks were consolidated and nationalized. The nationalized banks and foreign banks constituted the total banking system of Bangladesh. Investment Corporation of Bangladesh was established in 1976. Grameen Bank, a specialized bank for the poor but not under control f the Central Bank, was established in 1983. In the’) year 1983, the government allowed private sector to participate ii the 1 business.
The Public Bank and the Uttara Bank were denationalized in January 1985 due to non-profitability. This action reduced to the number of NCBs to four. The nationalized banks continue t receive refinancing and other subsidies in order to fill credit demand and government desires. Rupali Bank was converted into a public limited company on 14th December 1986. Rajshahi Krishi Unnayan Bank was established in 1987 through a bifurcation of the offices of Bangladesh Krishi Bank of Rajshahi division. Bank of Small Industries and Commerce Bangladesh Ltd. were established in 1993. This was made with the intent of reversing the urban monopoly of banking and the flow of capital from rural to urban areas. Such restructuring of public sector bank was in order to attain economic growth, and policies were formulated for scheduled banks to play their role in industry, agriculture, export, self-employment etc. As a result there has been advancement in the public sector banks in terms of increase in the number of branches, deposit mobilization, and advances to the society (Table-4). There are nine public sector banks, of which four are nationalized commercial banks and five are specialized banks.
Private Commercial Banks
Taking advantage of the liberalization policy of the government regarding participation of private sector in the banking business, a number of private sector banks were established in-and-after 1983. With the emergence of private banks in Bangladesh, a competitive situation in the sector has been created. There are twenty seven private banks in Bangladesh. They are: The City Bank (1983), International finance Investment and Commerce Bank (1983), Arab Bangladesh Bank (1986), Al-Baraka Bank Bangladesh (1995), South East Bank (1995) Dhaka Bank (1996), Dutch Bangla Bank (1996), Al-Arafa Islami Bank (1996), Social Investment Bank (1996), Mercantile Bank, Standard Bank, One Bank, EXIM Bank, Bangladesh Commerce Bank, Mutual Trust Bank, Premier Bank, The First Security Bank, Bank Asia, and The Trust Bank. The emergence of Private Banks has added a new dimension to the banking system in Bangladesh. The private commercial banks show a steady growth in terms of number of branches, deposit, and advances (Table-5).
Foreign Banks
The state Bank of India opened one branch during July-September 1975. In 1975, the four foreign banks operating in Bangladesh, were: (a) American Express International Banking Corporation, (b) Grind lays Bank, (c) The Chartered Bank, and (d) State Bank of India. Now, there are thirteen foreign banks – American Express Bank, ANZ Grindlays Bank, Standard Chartered Bank, State Bank of India, Habib Bank, Citibank N.A., Credit Agrocole Indousez, National Bank of Pakistan, Muslim Commercial Bank., The Bank of Nova Scotia, Hanil Bank, and Hong Kong and Shanghai Banking Corporation, Faysal Islamic Bank of Bahrain E.C. The foreign banks show a steady growth in terms of number of branches, deposit, and advances (Table-6).
Cooperative Banks
Cooperative banks are indigenous banks in model and function. They are organized in three tiers and their form of functioning is unit banking. The then British government promulgated cooperative rules in 1904 and 1912 to shape the organization. In 1947 the then East Pakistan had twenty-six thousand cooperatives, which collapsed after partition. The traditional cooperatives in Bangal were mostly organized by savings and credit societies. In 1948, Union Multipurpose Cooperative Societies (UMPCSs) were formed with government patronage but were mostly dissolved due to malfunctioning of the cooperative financing (Maloney and Ahmed, 1988: 115-6). The Land Mortgage Banks have been operating in India since 1929. They supplied long-term and medium term loans to their members on the mortgage of land for agriculture purpose. They also performed banking functions of deposit mobilization, supply of credit, and provision of remittance facilities.

2.1.5 Factors affecting change in Banking System
After independence, Bangladesh Bank had taken measures such as credit expansion, branch expansion, deposit mobilization, advances to priority sectors through the banks. (Chowdhury, 1973). Immediately after independence, to recover and reconstruct the war affected economy, Bangladesh signed several trade agreements with different countries, donor agencies, and international banks for inflow of capital in the form of aid, grant, loan, etc.
The Government and the Bangladesh Bank implemented several loan schemes for economic development and the government continuously adopted deficit budget and followed foreign aid financed development strategy. All these contributed to the growth of banks in Bangladesh (Sobhan and Islam, 1988, 182; Hossain, 1988: 211; Hashemi, 1988: 213; Bhattacharya, 1988:233: Ahmad, 1988:309).
The main factors which shaped the nature of development of the banking system in Bangladesh are:
(i) Nationalization of banks in 1972,
(ii) Inflow of capital under trade agreement to reconstruct the war affected economy, (iii) Bangladesh Bank’s policy measures for the growth of disciplined banking system and services to the deposit mobilization and loans to priority sectors,
(iv) De-nationalization and permission to open new private banks, (v) gradual growth in foreign trade,
(vi) Inflow of capital from the World Bank, Asian Development Bank, Islamic Development Bank, and other organizations and agencies and

(vii) Wage earners remittances. The institutional structure that has evolved for providing financial services consists of development financial institutions, investment institutions (insurance companies, trust) and scheduled commercial banks. The Banking Companies Act 1991 now regulates the activities of banks in Bangladesh.
2.2. Credit Management and Guidelines
2.2.1 Introduction
There is no iron clad formula to Inc and determine t1i guidelines for credit management. As a central hank l3at Bank sets the guidelines for commercial banks in operations. Such type of guidelines is gent in Commercial banks also have their own guidelines or plan of actions for sound credit management. Lending is most profitable business of a commercial bank but at the same tic it is risky. Loans always accompany credit risk arising out of borrower’s default in repaying the money. A banker should. Therefore, manage loan business in a j and S manner’. Commercial banks business in Bangladesh is regulated by the guidelines of central bank; the Bank companies 1 I and also the guidelines introduced by the World Bank and the IMF from time to time. How commercial banks in Bangladesh, both in public and private sector, are following such guidelines in their credit management operations is intended to be discussed this chapter.
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