Chapter 1 (Introduction to Banking)
A bank is one kind of financial institution which deals with money and other monetary
instruments and conducts business. Bank receives deposits from one group of people and
lends it to other groups of people. By this process, the bank earns a profit.
Generally, it is said that what a bank does is banking. A bank is an institution and banking
is the activities of that institution. For example- collecting deposit; discounting of bills,
draft, making pay order, money transfer, giving aid to business etc. The Oxford
Dictionary: “Banking is the business of a banker and the keeping or management of a
Bank.”
Q. What is Bank?
Bank is a financial institution that collects society’s surplus cash and gives a part of that
as loan to investors for earning profit. So, bank is an intermediary institution that makes
relationship between the owner of surplus savings and the investor of deficit capital. In
this process, banks earn profit by receiving interest from the borrowers who want to take
short term and long-term loans and making relatively lower interest payment to the
depositors for providing their funds for use by the bank.
Q. Differences Between Bank and Banking
Bank Banking
Entrepreneurs are the father of bank Origin Bank is the father of banking.
Bank is a financial institution which Definition Banking means the activities
receives a deposit from a group of undertaken by banks which include
people and lends it to other groups personal banking and
of people. commercial banking and corporate
banking.
The success of a bank depends on Purpose The purpose of banking is to help
the efficient banking system. the bank to perform its task.
The success of an efficient banking Success The success of banking depends on
system. the banker’s efficiency in planning
and management.
As the bank is created from a law it Legal It has no specific law under which
has a legal entity. the functions of banking are
performed.
Banks are liable to their customers Liability The liabilities of banking functions
for their functions. are on the owner of a bank.
Q. Banking System Around the World
In the prevailing world, commercial bank management systems are more or less similar
in principle. Dissimilarities exist in the scope of commercial banking activities in
different countries. Communist countries’ commercial banking system are completely
different. Capitalist countries differ in respect of the free market economic banking
activities. From this perspective, we can divide the major commercial banking systems in
different countries in the following groups:
1. Anglo-American Banking System: This system is prevalent in most of the countries
in the world along with Bangladesh. There is difference between commercial banking and
investment banking. Commercial banks cannot operate investment banking activities.
2. German Universal Banking System: This system is prevalent only in Germany.
There is no difference between commercial banking and investment banking in this
system. Commercial bank can operate any type of business activities. Commercial bank
can buy up to 40% share of corporate firms and participate in the ownership of the firm.
3. Japanese Main Banking System: This system is closely related to the relationship
banking. In this system there are difference between investment banking and commercial
banking. But commercial have no restriction to participate in the ownership of corporate
firms. The bank can buy 5% share of any companies and participate in the ownership.
4. Indian Lead Banking System: This system was developed in India by the end of
1960. Every lead bank performs extra responsibilities with the existing commercial
banking system. This system divides the country’s geographical area in different
segments and only one leader bank is selected for each area.
Q. Banking Issues in the 21st Century
Financial Systems evolve through time, Passing through three phases:
Phase one: This phase is bank oriented where most external finance is raised through the
bank loans which in turn is funded through savings. Banks are the most important
financial intermediaries in the financial systems and interest income is the main source of
revenue.
Phase two: This phase is market oriented. Households and institutional investors begin to
hold more securities and equity and non-banking financial institutions offer near bank
products such as money market accounts.
Phase three: In this phase trading, underwriting, advising and asset management
activities have become more important for banks than the traditional core banking
functions.
The position of the banking sector at the beginning of the new century:
1. It will be wise to begin with the performance of banks measured by banks
profitability: It is mentionable that in 1980 Japanese banks were very profitable, became
even more so. But banks profit elsewhere either trend less or slipping. The recovery to
average levels in 1999 was short lived.
2. The growth of bank assets: In the 1970s, banks asset grew rapidly in nominal terms
across the 14 countries. But more restrictive monetary policies and lower inflation
contributed to the sharply lower growth of banks assets almost everywhere in the 1980s.
3. Bank Foreign Assets:
• Foreign assets growth rates tended to outpace domestic asset in all three decades.
• The average ratio of total assets to nominal GDP for most industrial countries rose
in 1970.
• For Switzerland, banking assets had been more than 100% off national income in
1970s & very nearly so for Japan and Germany.
• In other countries, there had been a steady rise from 40% to 60% of national
income in 1970s to well over 100% by the 1970s.
4. Employee Cost: While profitability was fairly static, banks were looking for other
sources of income by expanding into non- interest income areas.
5. Share Price Performance: The relative share price performance of banks gives the
most important idea of what the market thinks about future prospects of the bank
compared to the other sectors.
Q. Bangladesh Bank (BB) Central Bank of Bangladesh
Bangladesh Bank (BB) has been working as the central bank since the country’s
independence. Its prime jobs include issuing of currency, maintaining foreign exchange
reserve and providing transaction facilities of all public monetary matters. BB is also
responsible for planning the government’s monetary policy and implementing it thereby.
Q. Establishment (Bangladesh Bank)
Bangladesh Bank, the central bank and apex regulatory body for the country's monetary
and financial system, was established in Dhaka as a body corporate vide the Bangladesh
Bank Order, 1972 (P.O. No. 127 of 1972) with effect from 16th December, 1971. At
present it has ten offices located at Motijheel, Sadarghat, Chittagong, Khulna, Bogra,
Rajshahi, Sylhet, Barisal, Rangpur and Mymensingh in Bangladesh; total manpower
stood at 6341 (officials 4879, subordinate staff 1462) as on April 22, 2021.
Q. Functions of Bangladesh Bank
BB performs all the core functions of a typical monetary and financial sector regulator,
and a number of other non-core functions. The major functional areas include:
▪ Formulation and implementation of monetary and credit policies.
▪ Regulation and supervision of banks and non-bank financial institutions,
promotion and development of domestic financial markets.
▪ Management of the country's international reserves.
▪ Issuance of currency notes.
▪ Regulation and supervision of the payment system.
▪ Acting as banker to the government.
▪ Money Laundering Prevention.
▪ Collection and furnishing of credit information.
▪ Implementation of the Foreign exchange regulation Act.
▪ Managing a Deposit Insurance Scheme.
Q. Functions of Bangladesh Bank
A. General functions: B. Purposeful functions:
1. Issue of notes and coins 1. Control currency market
2. Government bank 2. Stabilize exchange rate
3. Banker’s bank 3. Maintain gold standard
4. Lender of the last resort 4. Stabilize price level
5. Reservoir of foreign currency 5. Employment opportunities
6. Clearing house
7. Credit control
C. Expansion and development D. Other functions:
functions: 1. Adviser and representatives of
1. Development of agriculture sector government
2. Development of industrial sector 2. Economic research
3. Development of natural resources
Q. Overview of Financial system of Bangladesh
The financial system of Bangladesh is comprised of three broad fragmented sectors:
• Formal Sector,
• Semi-Formal Sector,
• Informal Sector.
The sectors have been categorized in accordance with their degree of regulation.
1) Formal Sector: The formal sector includes all regulated institutions like Banks, Non-
Bank Financial Institutions (NBFIs), Insurance Companies, Capital Market
Intermediaries like Brokerage Houses, Merchant Banks etc.; Micro Finance Institutions
(MFIs).
2) Semi Formal Sector: The semi formal sector includes those institutions which are
regulated otherwise but do not fall under the jurisdiction of Central Bank, Insurance
Authority, Bangladesh Securities and Exchange Commission (BSEC) or any other
enacted financial regulator. This sector is mainly represented by Specialized Financial
Institutions like House Building Finance Corporation (HBFC), Palli Karma Sahayak
Foundation (PKSF), Samabay Bank, Grameen Bank etc., non-Governmental
Organizations (NGOs) and discrete government programs.
3) Informal Sector: The informal sector includes private intermediaries which are
completely unregulated.
Q. Banking Sector of Bangladesh
The banking sector in Bangladesh consists of several types of institutions. Bangladesh
Bank is the central bank of Bangladesh and the chief regulatory authority in the banking
sector.
Pursuant to Bangladesh Bank Order, 1972 the Government of Bangladesh reorganized the
Dhaka Branch of the State Bank of Pakistan as the central bank of the country, and
named it Bangladesh Bank with retrospective effect from 16 December 1971. Other than
the Central Bank itself, banks in Bangladesh are primarily categorized into two types:
Scheduled and Non-Scheduled banks.
1) Scheduled Banks: Scheduled banks are licensed under the Bank Company Act, 1991
(Amended up to 2013). Currently, there are 61 scheduled banks in Bangladesh.
➢ State-owned commercial banks ➢ Specialized Banks (SDBs)
(SOCBs) 3 specialized banks are now operating
There are 6 state-owned commercial banks which were established for specific
(SOCBs) which are fully or majorly objectives like agricultural or industrial
owned by the Government of Bangladesh. development. These banks are also fully or
1. Sonali Bank Limited majorly owned by the Government of
2. Janata Bank Limited Bangladesh.
3. Agrani Bank Limited • Bangladesh Krishi Bank
4. Rupali Bank Limited • Rajshahi Krishi Unnayan Bank
5. BASIC Bank Limited • Probashi Kollyan Bank
6. Bangladesh Development Bank
➢ Private Commercial banks (PCBs) ➢ Foreign Commercial Banks
There is a total of 43 PCBs in Bangladesh (FCBs)
are in operation right now. They are In total 9 FCBs are operating in
majorly owned by private entities and Bangladesh as the branches of the banks
classified into two types. which are incorporated in abroad.
▪ Conventional PCBs • Bank Al-Falah Limited (United Arab
In total 33 conventional PCBs are now Emirates)
operating in the industry. They perform the • Citibank N.A (United States of
banking functions in conventional fashion America)
i.e., interest-based operations. Example: • Commercial Bank of Ceylon PLC
AB Bank Limited, Bangladesh Commerce (Sri Lanka)
Bank Limited, Bank Asia Limited, BRAC • Habib Bank Limited (Pakistan)
Bank Limited. • HSBC (Hong Kong)
▪ Islami Shariah Based PCBs • National Bank of Pakistan (Pakistan)
There are 10 Islami Shariah-based PCBs • Standard Chartered Bank (United
in Bangladesh and they execute banking
Kingdom)
activities according to Islami Shariah-
• State Bank of India (India)
based principles i.e. Profit-Loss Sharing
• Woori Bank (South Korea)
(PLS) mode. Example: Al-Arafah Islami
Bank Limited, EXIM Bank Limited, First
Security Islami Bank Limited.
2) Non-Scheduled Banks: Non-scheduled banks are licensed only for specific functions
and objectives, and do not offer the same range of services as scheduled banks. There are
now 5 non-scheduled banks in Bangladesh.
• Ansar VDP Unnayan Bank
• Karmashangosthan Bank
• Grameen Bank
• Jubilee Bank
• Palli Sanchay Bank
Q. Non-Bank Financial Institutions (NBFIs)
Non-bank financial institutions (NBFIs), simply known as financial institutions (FIs), are
those types of financial institutions which are regulated under Financial Institution Act,
1993 and controlled by Bangladesh Bank. Now, 34 NBFIs are operating in Bangladesh
while the maiden one was established in 1981. Out of the total, two are fully government
owned, one is the subsidiary of a SOCB, 15 were initiated by private domestic initiative
and 15 were initiated by joint venture initiative. Example,
• Agrani SME Financing Company Limited
• Bangladesh Finance and Investment Company Limited (BD Finance)
• Bangladesh Industrial Finance Company Limited (BIFC)
• Bangladesh Infrastructure Finance Fund Limited (BIFFL)
• Bay Leasing & Investment Limited
• Delta Brac Housing Finance Corporation Ltd. (DBH)
Q. Specialized financial institutions (semi formal sector)
• Bangladesh House Building Finance Corporation (BHBFC)
• Palli Karma Sahayak Foundation (PKSF)
Q. Commercial Banks
A commercial bank is a kind of financial institution that carries all the operations related
to deposit and withdrawal of money for the general public, providing loans for
investment, and other such activities. These banks are profit-making institutions and do
business only to make a profit.
Q. Major Factors Contributing to Economic Growth
Economic growth in Bangladesh has been helped largely by export earnings from the
ready-made garments (RMG) sector; remittances sent by migrant workers; growth in the
agricultural sector; expansion in Medium, Small and Micro Enterprises (MSMEs);
decline in the rate of population growth; and the government's safety net programs.
First, considerable expansion has taken place in the RMG sector since the late 1970s.
Today, it is the most important industry in the country; and Bangladesh is the second
largest apparel exporter of western brands, after China. The RMG sector accounts for
around 82 per cent of total exports.
Second, being a labour surplus country, annually about 0.5 million Bangladeshis migrate
abroad in search of jobs. According to the Bureau of Manpower Employment and
Training (BMET), the total number of Bangladeshi labour migrants was around 11.5
million in 2017. The figure represents about 4.5 per cent of the country's population and
11 per cent of its labour force (BMET 2018). With increase in the number of migrant
workers, there has been considerable increase in the amount of annual remittance.
Third, agriculture sector witnessed remarkable progress, despite continued loss of arable
land. There has been a sharp increase in food grain production during the last over four
decades. The increase has been made possible as a result of a liberalised input market and
expansion of irrigation, encouraging farmers to adopt the new seed-fertiliser technology.
Fourth, small and medium enterprises (SMEs) has played a vital role in promoting
economic growth, poverty reduction, and employment generation. The Government of
Bangladesh highlighted the importance of SMEs in its Industrial Policy; and it has been
identified as a 'thrust sector' by the Ministry of Finance. However, to efficiently run
SMEs, allocation of adequate funds and skill development of both entrepreneurs and
workers are critically needed.
Q. Management of Commercial Bank
Management is a universal concept which is necessary for the success of not only profit
oriented business organizations but also for non-trading and non-profit organizations such
as – family, club, religious institutions, self-serving organizations and nationalized
institutions.
But from the very outset, “bank” popularly means only commercial banks. Although
different types of banks are found at present, only commercial banks are the major
participants in the banking world. Commercial banks more or less have been performing
all types of activities of specialized banks. The usual activities of commercial bank and
specialized banks are almost the same. For Example, both the commercial banks and
specialized banks may also take money as deposit, but sometimes-specialized banks are
engaged in the collection of government long-term debt fund.
Q. Role of Banks(Commercial Bank) in Economic Growth
Commercial banks have been playing an important role in the economic development of
Bangladesh. They provide investible funds to both the public sector, and specially the
private sector. Further, banks have played a significant role in respect of the four major
drivers of economic growth in Bangladesh as discussed earlier.
The banking sector, however, is faced with various challenges, which include among
others, 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 Non-Performing Loans (NPLs).
Bangladesh is an import-dependent country. It needs to import raw materials, accessories
and machineries to foster development of the industrial sector, including the RMG sector.
Banks have been facilitating payment, finance and risk management services to the
sector.
Q. Rationale of Increasing Importance of Bank Management
The only way to achieve a handsome amount of profit compared to similar kinds of
organizations is to establish skilled & efficient management in any organization. The
bank is a profit-oriented organization; therefore, its management procedure is more
challenging as the regulatory system always is time to control bank management. The
following diagram shows how the bank management becomes more challenging over
time.
So above diagram shows the day by day, bank management becomes more complicated
due to the effect of these three determinants. A small description of these three factors is
given below:
1) Changing Regulation for Banks: It is a normal phenomenon to change banking
procedure from time to time in the same country or in different countries according to
public benefits. Banks regulatory authorities are more careful to prevent bank failure, to
ensure the safety of the fund of depositors and ensure loan distribution for all.
Some techniques followed by the bank regulatory authorities to control over the activities
of commercial banks are:
• Direction for the right price of bank services.
• Introduction of deposit insurance.
• Direction for adequate liquidity.
• Direction for capital adequacy.
• Direction for approval & non approval of bank loan operation.
• Recruitment of directors and direction regarding recruitment and directing their
duties and responsibilities.
• Loan supervision, review and examination.
• Direction for adequate reserve etc.
2) Increasing Competition due to Changing Technological Development: Number of
served clients and quality & dimensions of services are the basis of competition. The
bank which provides better service with high quality is capable of being successful in
competition. The client of one bank may go to another bank of the same locality just
because of better service. So, in order to withstand competition bank management needs
to innovative and challenging. Technological environment absorbs more investment and
new training.
3) Changing International Relationship: In international banking business, the bank
faces extensive amount of legislation in the event of a new problem. International
relations, global or bilateral, create more competition in banking business. Other factors,
such as changes in international trade and commerce, laws of fund transfer, change in
social and cultural factors establish new operational management system which challenge
the banking business.
