The Banking Industry of Bangladesh

THE BANKING INDUSTRY OF BANGLADESH

 Introduction:

The gradual improvement in the overall policy environment has enabled Bangladesh to improve its economic performance in recent years. Successive governments in Bangladesh have been confronted with the problem of stimulating the economic growth rate in a country where a substantial segment of the population lives below the subsistence level. Economic policies are still guided by five year plans. Nevertheless, some progress has been made over the years, such as self -sufficiency in food grain production, reducing the population growth rate, poverty alleviation and boosting export income. The GDP growth per annum has been about 5 percent on an average from 1994-2000; Per capita GDP was $363 in 1999-2000.

The prospect of economic growth in Bangladesh in the near future will depend on the pace of economic reforms and the quality of macroeconomic management. Accelerating the rate of economic growth will require higher levels of investment. This will primarily come from private flows of foreign direct investment. This can be established by reforming the financial system and continuing the process of financial deepening.

The financial system in Bangladesh is relatively small and less developed than in most countries in South and East Asia. The sector’s contribution to GDP has remained static at 1.5 percent during 1999-2000 periods. Commercial banks are at the heart of this financial sector by contributing 80% of the total. The depth of the financial system, as measured by the ratio of the broad money supply to GDP, has been growing slowly and was low at around 32% in 1999-2000.

However, as the government is often the owner and regulator as well as the supervisor and customer of a bank, there has been ample opportunity for mismanagement over the years. The banking sector is plagued with a lack of credit discipline, archaic loan recovery law, corruption, inefficiency, overstaffing, etc. Several reform measures of the financial sector have been taken to improve the situation. Relative stability achieved by the support extended by both the central bank and the Government of Bangladesh in the past has restored public confidence in the country’s banking sector. Moreover, Nationalized Commercial Banks (NCBs) and old generation Private Commercial Banks (PCBs) would have to lower the rate of NPAs in their portfolios. Failure to do so would mean re-capitalization, at least for the NCBs. This may in turn lead to a further drain on the limited resources of the Government of Bangladesh. At this time or in the immediate future this re-capitalization would not be feasible. With these conditions in place, the World Bank anticipates the likelihood of a situation where the ever-increasing burden of non-performing loans and growing rate of debt servicing would place the economy under enormous strain and result in a crisis in the banking sector in the long term.

Market Segment

The banking industry of Bangladesh is mainly divided into two sectors, such as Specialized Banks (SBs) and Commercial Banks (CBs). The Specialized Banks are those banks that deal with specific sectors or industry of an economy. For instance, Bangladesh Krishi Bank (BKB) only deals with the agricultural sector of the economy; Bangladesh Shilpa Bank (BSB) only deals with the industrial sector of the economy, etc.

On the other hand, Commercial Banks are Scheduled Banks that are operating in the country under the rules and regulations of the Central Bank. Commercial banks in turn can be grouped as Nationalized Commercial Banks (NCBs); Foreign Commercial Banks (FCBs) and Private Commercial Banks (PCBs) with three different segments, such as 1st Generation Private Commercial Banks, 2nd Generation Private Commercial Banks, and 3rd Generation Private Commercial Banks.

The Bangladesh Bank (BB) Order created in 1972, authorized Bangladesh Bank (BB) as the central bank of the country. Bangladesh Bank Order 1972 and the Banking / Companies Act 1991 mainly guide the commercial banks in Bangladesh. Commercial Banks in Bangladesh are not allowed to do business other than just banking. Normal activities include borrowing, raising or taking up of money, lending or advancing of money with or without security. They are also authorized to issue letters of credit, trade in precious commodities and buying and selling of foreign goods excluding foreign bank notes. They are also authorized to trade in bills of exchange, promissory notes, coupons, drafts, debentures, certificates and other instruments approved by Bangladesh Bank (BB). Banking companies are required to provide safe vaults and are authorized to collect money and securities.

All banks operating in Bangladesh with different paid-up capital and reserves having a minimum of an aggregate value of Tk. 5 million and conducting their affairs to the satisfaction of the Bangladesh Bank have been declared as scheduled banks in terms of section 37(2) of Bangladesh Bank Order 1972. Now in terms of section 13 of Bank Company Act, 1991, the minimum aggregate capital is Tk. 200 million.

After liberation, the banks operating in Bangladesh (except those incorporated abroad) were nationalized. These banks were merged and grouped into six commercial banks. Of the total six commercial banks, Pubali Bank Ltd. and Uttara Bank Ltd. have subsequently been transferred to the private sector with effect from January 1985. Moreover at present there are 51 scheduled banks operating allover the country. Out of these, 9 are state-owned (including five specialized banks), 30 are private commercial banks (including four Islami banks) and the remaining 12 are foreign commercial banks (including one Islami bank).

The name of all the banks operating in Bangladesh and their year of incorporation are given in table 1.

Table 1.  Name of the Banks operating in Bangladesh

NAME OF THE BANKDATE OF INCORPORATIONNAME OF THE BANK DATE OF INCORPORATION
Nationalized Commercial BanksSpecialized Banks
Sonali Bank1972BKB1972
Janata Bank1972BSB1972
Agrani Bank1972BSRS1972
Rupali Bank Ltd.1972RAKUB1987
  BASIC1988
Private Commercial Banks
1st Generation Private Banks(1982 – 1988)2nd Generation Private Banks(1992 – 1996)
Arab Bangladesh Bank Ltd.1982Eastern Bank Ltd.1992
Uttara Bank Ltd.1983National Credit & Commerce Bank Ltd.1993
National Bank Ltd.1983Prime Bank Ltd.1995
Islami Bank Bangladesh Ltd.1983Dhaka Bank Ltd.1995
IFIC Bank Ltd.1983Southeast Bank Ltd.1995
United Commercial Bank Ltd.1983Al-Arafa Islami Bank Ltd.1995
The City Bank Ltd.1983Social Investment Bank Ltd.1995
Pubali Bank Ltd.1984Dutch-Bangla Bank Ltd.1996
Al-Baraka Bank Ltd.1987
3rd Generation Private Banks(1998 – Present)Foreign Commercial Banks
Bangladesh Commerce Bank1998Standard Chartered Grindlays Bank1905
Mercantile Bank Ltd.1999Standard Chartered Bank1948
Standard Bank Ltd.1999American Express Bank Ltd.1996
One Bank Ltd.1999State Bank of India1975
Exim Bank Ltd.1999Habib Bank Ltd.1976
Premier Bank Ltd.1999Muslim Commercial Bank1994
Mutual Trust Bank Ltd.1999National Bank of  Pakistan1994
First Security Bank Ltd.1999CITI Bank, N.A.1995
Bank Asia Ltd.1999HSBC1996
The Trust Bank Ltd.1999Shamil Islami Bank1997
Jamuna Bank 2001Credit Agricole Indosuez1997
Shahjalal Bank2001Hanvit Bank1999
BRAC Bank2001Mashreq2001

Source: Bangladesh Bank.

Current Status of the Banking Industry

The Banking Industry of Bangladesh at present is in the growth stage. Almost every year new private banks are coming up, new branches are opening within two to three months, new customers are coming to open an account in different banks. As a result, according to July 30, 2001 there are 4 nationalized commercial banks, 5 specialized banks, 30 local private commercial banks and 12 foreign commercial banks operating in this country. Moreover, as on July 30, 2001 there are 27,881,322 numbers of deposit accounts and 7,462,785 numbers of advance accounts in the banks.

Market Size and Market Growth Rate

Market size of an industry can be measured by many ways, such as Total Revenue, Volume of production number of customers and so on. However, in case of the Banking sector the measurement of market size is quite peculiar as both the total amount of deposits and advances are taken into consideration.

The following table shows that the number of total branches off all the banks grew from 5,852 to 6,124 during 1995 – 2002 February:

Table 2  Number of Bank Branches

YearNCBSBPCBFCBTotal
19953,6151,1491,066225,852
19963,6201,1701,080265,896
19973,6171,1731,117275,934
19983,6171,1751,150295,971
19993,6161,1771,214316,038
20003,6061,1911,245346,076
2001(Feb)3,6081,2141,268346,124

Source: Scheduled Bank Statistics, Bangladesh Bank, July – Sept 2000; Economic Trends, March 2001.

 Area wise distribution of bank branches operating in Bangladesh is depicted in table 3:

Table 3  Area Wise Distribution of Bank Branches

UrbanRuralTotal
NCBs21.99 %37.36 %59.35 %
SBs2.45 %17.15 %19.60 %
FCBs0.56 %0 %0.56 %
PCBs15.22 %5.27 %20.49 %
All Banks40.22 %59.78 %100 %

Source: Scheduled Bank Statistics, Bangladesh Bank, July – Sept 2002.

The largest provider of advances among all the banks is the Nationalized Commercial Banks. With their high number of branches scattered throughout the country NCBs topped the list with Tk. 290,800 million in 2000 (September) remotely followed by Private Banks (Tk. 181,380 million). The share of advances of the SBs and PCBs are increasing at an alarming speed than the NCBs. However, the share of FCBs is consistent. Therefore, table 6 shows advances by category of banks.

Table  4  Advances by Category of Banks (Amount in million Taka): 

YearNCBSBPCBFCBTotal
1997182,58059,91087,63018,560348,680
1998208,62065,370101,28020,410395,680
1999234,48067,200111,97023,780437,430
2000260,28091,310130,31027,520509,420
2001278,66097,360157,69030,260563,970
2002 (Sept.)290,800101,450181,38032,980606,610

Source: Scheduled Bank Statistics, Bangladesh Bank, July – Sept 2002.

Again NCBs also dominate in the total deposits. It can be seen from the table below that over the years the share of NCBs, FCBs, and SBs are decreasing, whereas the share of PCBs is increasing significantly. Therefore, table 5 shows the deposits by category of banks.

Table 5  Deposits by Category of Banks (Amount in million Taka):

YearNCBSBPCBFCBTotal
1997254,54020,110114,23021,240410,120
1998277,56021,330129,72027,370455,980
1999307,38025,530135,45031,220499,580
2000342,39029,660155,18041,940569,170
2001375,79038,170188,73048,240650,930
2002 (Sept.)400,66244,880222,30060,256728,098

 Regulation of the Banking Industry

Bangladesh Bank, being the central bank exerts supervisory controls over the banking sector. BB requires that banks have a minimum paid up capital and reserve funds and that no person, family or company own more than 10% of bank share personally, jointly or both. Bangladesh Bank may with prior Government approval at any time change the policy regarding the reservation of risk-based capital of assets. BB may determine policy to control advances by banking companies. BB has direct authority to appoint any new Managing Director, General Manager, or CEO and BB can dismiss none so appointed without prior approval. BB also has the power to supersede the Board of Directors of a banking company. BB is also the official liquidator and has the power to give directions to a banking company and also remove directors when it feels that this may be in public interest. Banking companies in Bangladesh are not allowed to form subsidiaries, although this rule may be amended soon.

The World Bank recently called BB as “a weak central bank” in its report entitled ‘Bangladesh: Key Challenges for the Next Millennium’. The functions and responsibilities of BB are not clearly defined, and it lacks autonomy in such core areas as the licensing of new banks, monetary and exchange rate policies, and the supervision of NCBs. Banks are allowed to operate even though some of them suffer from capital deficiency. Loan classification and provisioning are not fully enforced, and no punitive measures are taken against banks that fail to implement agreed corrective measures. BB would be unable to deal with a banking sector crisis if one were to occur. With over 6,200 staff, of whom 1,720 are clerical, BB is significantly overstaffed relative to the size of the financial system.

Market Entry & Exit

Bangladesh Bank (BB), the central bank of Bangladesh, has the authority to determine the entry and exit rules of all the banks operating in Bangladesh. BB performs the traditional central banking roles of note issue and banker to the government and banks. It formulates and implements monetary policies, manages foreign exchange reserves and supervises banks and non-bank

Industry’s Competitive Forces

Rivalry among the Competitors

In the banking industry, rivalry among the competing banks is moderate to high due to the following reasons:

–          Major rivals are equal or close to in size and capability (revenue and volume).

–          Exit barriers are high.

–          New private banks are snatching share from the NCBs and each other’s customers by providing extra benefits.

–          Slow market growth due to the sluggish economy.

–          Depositor’s cost of switching banks is low.

Substitutes

There are substitute financial institutions that do many of the activities and transactions of a bank in the leasing field but these financial and leasing institutions are too small in size. These institutions can shrink the profit margin of commercial banks. Industrial Leasing and Development Company Ltd. (IDLC), Industrial Promotion and Development Corporation (IPDC), United Leasing Company are the key players. They provide industrial leasing to many companies in the country. Vanik Bangladesh Ltd., a merchant bank provides investment counseling and credit services among its other financial activities. But some of the operations of the banks like exporting / importing have no substitutes.

Power of Suppliers

Depositors are considered to be the suppliers of the banks. There are thousands of depositors from all walks of life. There are businessmen, service holders, farmers, students and people from virtually any other professions who are depositors of the banks. Big amount depositors have strong powers in determining interest rate of their deposits. However, the following table (table 6) would provide information regarding depositors of different categories of banks:

Table 6: Deposits (no. of accounts) of Different Categories of Banks as on 30.09.2002

               (Amount in million Taka):

Types of BankNo. of AccountsAmountsDeposits per Account
NCB21,049,573400,66219,034
SB3,428,06144,88013,092
PCB4,210,770222,30052,793
FCB129,77560,256464,311
Total28,818,179728,098

Source: Scheduled Bank Statistics, Bangladesh Bank, July – Sept 2002.

If the amount of deposits were distributed sector wise, it would look like the following table:

Table 7: Sector Wise Deposits as on 30.09.2002 (Amount in million Taka):

Public SectorPrivate SectorGrand Total
GovernmentOthersTotal
53,87081,450135,320592,778728,098
7.40 %11.19 %18.59 %81.41 %100 %

Source: Scheduled Bank Statistics, Bangladesh Bank, July – Sept 2002.

If deposits were distributed account size wise, it would look like the following table:

Table 8  Account Size Wise Deposits as on 30.09.2002 (Amount in million Taka):

Size of A/CNCBSBPCBFCBTotal
Up to Tk. 10,000152,66717,67835,7761,830207,950
Tk. 10,001 – Tk. 100,000102,0159,54473,70110,353195,613
Tk. 100,001 – Tk. 1,000,00057,4675,99368,09921,860153,419
Tk. 1,000,001 – Tk. 10,000,00052,1079,04636,17514,993112,322
Tk. 10,000,001 and above36,4062,6198,45911,22058,704
Total400,66244,880222,30060,256728,098

Source: Scheduled Bank Statistics, Bangladesh Bank, July – Sept 2002.

If amounts of deposits were distributed area wise, it would look like the following table:

 Table 9: Area Wise Deposits as on 30.09.2002 (Amount in million Taka):

Types of BankUrbanRuralTotal
NCB276,318124,344400,662
SB24,30320,57744,880
PCB202,55619,744222,300
FCB60,25660,256
Total563,433164,665728,098

Source: Scheduled Bank Statistics, Bangladesh Bank, July – Sept 2002.

 Sector wise distribution of deposits is given in table 10 for individual types of banks:

 Table 10: Deposits Distributed by Sectors and Types as on 30.09.2002 (Amount in

                 million Taka):

 Public SectorPrivate SectorTotal
NCBs98,099302,563400,662
SBs7,78937,09144,880
PCBs28,575193,725222,300
FCBs85459,40260,256

 Source: Scheduled Bank Statistics, Bangladesh Bank, July – Sept 2002.

  Power of Buyers

Creditors are considered to be the buyers of the banks. There are thousands of creditors from all walks of life. Mainly businessmen are the major buyer of Bank’s credit. Big amount creditors have strong powers in determining interest rate of their credit amounts. Banks distinguish their prime customers from others by setting a prime interest rate for them. However, the following table (table 13) would provide information regarding creditors of different categories of banks:

Table 11: Advances (no. of accounts) of Different Categories of Banks as on 30.09.2002

                 (Amount in million Taka):

Types of BankNo. of AccountsAmountsAdvance per Account
NCB3,209,024290,80090,620
SB3,400,910101,45029,829
PCB292,534181,380620,034
FCB18,79832,9801,754,602
Total6,921,266606,610

Source: Scheduled Bank Statistics, Bangladesh Bank, July – Sept 2002.

 If amount of advances were distributed sector wise, it would look like the following table:

 Table 12: Sector Wise Advances as on 30.09.2002 (Amount in million Taka):

Public SectorPrivate SectorGrand Total
GovernmentOthersTotal
13,55346,74560,298546,312606,610
2.23 %7.71 %9.94 %90.06 %100 %

Source: Scheduled Bank Statistics, Bangladesh Bank, July – Sept 2002.

If advances were distributed account size wise, it would look like table 13:

Table 13: Account Size Wise Advances as on 30.09.2002 (Amount in million Taka):

Size of A/CNCBSBPCBFCBTotal
Up to Tk. 10,00037,78041,0604,34624983,435
Tk. 10,001 – Tk. 100,00040,9894,83222,6483,34571,816
Tk. 100,001 – Tk. 1,000,00061,55616,73359,1066,067140,462
Tk. 1,000,001 – Tk. 10,000,00080,48129,55869,19314,834194,066
Tk. 10,000,001 and above72,9949,26726,0878,485116,831
Total290,800101,450181,38032,980606,610

Source: Scheduled Bank Statistics, Bangladesh Bank, July – Sept 2002.

If amounts of advances were distributed area wise, it would look like the following table:

Table 14: Area Wise Advances as on 30.09.2002 (Amount in million Taka):

Types of BankUrbanRuralTotal
NCB237,41553,385290,800
SB59,10842,342101,450
PCB177,7073,673181,380
FCB32,98032,980
Total507,21099,400606,610

Source: Scheduled Bank Statistics, Bangladesh Bank, July – Sept 2002.

Industry Trends

Market capitalization

Market capitalization of NCBs exists for only Rupali Bank Limited though the Government owns the majority stake. The total market capitalization of Rupali Bank stood at Tk. 1,078.12 million on September 22, 2001 and the book value of equity was Tk. 5,118 million. This huge difference depicts that public’s acceptability of NCB is not good at all.

The total market capitalization of 1st generation PCBs is TK. 5,420.87 million as on September 22, 2001 with the highest capitalization of IBL of Tk. 1,649.76 million and the lowest capitalization of Tk. 298.24 million of Uttara Bank Ltd. In the table (table 15) below it can be seen that for all the banks market value is lower than the book value, which implies that public cannot trust these banks.

 Table 15: Market Capitalization of 1st Generation Banks:

1st Generation BanksNo. of Shares(in million)MarketCapitalization(in million)Book Value ofEquity
Pubali Bank Ltd.1.60386.80804.00
Uttara Bank Ltd.0.99298.24679.00
IFIC Bank Ltd.2.80980.001,107.00
National Bank Ltd.4.301,043.831,556.50
Islami Bank Ltd.0.641,649.762,394.88
UCBL2.30330.05565.00
The City Bank Ltd.1.60417.60423.12
Al-Baraka Bank Ltd.0.26314.60320.00
Total5,420.87

Source: Scheduled Bank Statistics, Bangladesh Bank, September 22, 2002.

The total market capitalization of 2nd generation PCBs is Tk. 6,988.15 million as on Eastern Bank Ltd. and the lowest capitalization of Tk. 322.38 million of Al-Arafa Islami Bank. In the table below (table 18) it can be seen that the market value is greater than the book value for most of the banks, which implies that public’s acceptability for these bank is higher.

Table 16: Market Capitalization of 2nd Generation Banks:

2nd Generation BanksNo. of Shares(in million)MarketCapitalization(in million)Book Value ofEquity
Eastern Bank Ltd.6.001,680.001,700.50
NCCBL3.90784.88623.23
Prime Bank Ltd.4.001,444.00897.00
Dhaka Bank Ltd.2.70858.60419.00
South-East Bank Ltd.3.00765.75564.64
Al-Arafa Islami Bank Ltd.0.25322.38298.00
Dutch-Bangla Bank Ltd.1.80728.55361.12
SIBL0.20404.00216.75
Total6,988.15

Source: Scheduled Bank Statistics, Bangladesh Bank, September 22, 2002.

Conclusion:

No financial system can operate if banks do not function according to commercial criteria. While supervisory and regulatory measures can help in this regard, on their own they will not be enough. They must be accompanied by a Government commitment, publicly announced and backed at the highest political level, that banks will be allowed to operate without any direct Government interference in their commercial decisions and that banking laws and financial discipline must be rigorously enforced without regard to persons. Implementation of reforms may involve pain and costs. But experience elsewhere in the world suggests that the longer the delay, the greater the pain, sacrifice and costs.

banking industry