50th Year of Bangladesh Banking

January 1, 2021

Banking sector of Bangladesh commenced the journey under the leadership of the Father of the Nation Bangabandhu Sheikh Mujibur Rahman as part of his economic rebuilding movement in the newly independent Bangladesh in a situation of difficult economic and natural shocks. The newly independent nation inherited a fragile banking structure consisting of 2 Bangladeshi banks with 155 branches, 10 Pakistani banks with 920 branches, and 3 foreign banks with 14 branches. In such a circumstance, the foundation of the independent banking system of Bangladesh was laid through the establishment of the Bangladesh Bank- the central bank of the country by the Presidential Order No. 127 of 1972 that took effect from December 16, 1971.

Bangladesh banking sector started with six nationalized entities. To ensure social justice and equity, the general nationalization program was also applied to the banking industry, and the banks were restructured into six nationalized banks: Sonali, Agrani, Janata, Rupali, Pubali, and Uttara Bank under Bangladesh Bank Nationalization Order 1972. After that, to ensure adequate credit facilities to the industry and agriculture sector, the then government set up three specialized institutions ‘Bangladesh Shilpo Bank’, ‘Bangladesh Shilpo Rin Songstha’ and Bangladesh Krishi Bank’.  Foreign banks, functioning at that time, were also allowed to operate.   

Reform initiatives have notable implications for the changes and development of the banking sector of Bangladesh. Initiatives to reform the banking sector in Bangladesh may be traced to the beginning of the 1980s when a few private sector banks were allowed and denationalization of the Uttara Bank and Pubali Bank took place. Money, Banking, and Credit Commission was constituted in the mid-1980s to define the scope and modalities of the early phase of the reform. As part of the reform, of the notable initiative, a new system of loan classification and provisioning was introduced in 1989. Practically, wide-ranging banking reform measures were undertaken under World Bank’s Financial Sector Reform Project (FSRP) in the 1990s under which the focus of reforms included gradual deregulations of the interest rate structure, providing market-oriented incentives for priority sector lending, and improvement in the debt recovery environment. After the expiry of FSRP in 1996, the government of Bangladesh formed a Bank Reform Committee (BRC) that gave highest priority to the restructuring of the supervisory and regulatory set up for ensuring strong system of enforceable oversight of banks. While the issue of risk-based supervision and adoption of Basel-I were spelled out in FSRP, it was indeed the reforms in post-2000 that had a de facto focus on risk-based banking supervision. The Central Bank Strengthening Project (CBSP) initiated in 2003 focused on effective regulatory and supervisory systems for the banking sector, particularly strengthening the legal framework, automation, and human resource development and capacity building of the central bank. The Enterprise Growth and Bank Modernization Project were adopted in 2004 by the World Bank to help the government achieve a competitive private banking system and corporatization of a substantial shareholding in the public sector banks. After the expiry of BRC/CBSP program, there were many remarkable regulatory and supervisory initiatives for the consolidation of the banking sector. Regulatory changes have been installed in several areas either to align these with the global standards or to address internal needs and requirements.

Following the privatization initiatives in the banking industry in 1982, a good number of private commercial banks have been allowed in mid-1993-95, and 2012-13. By the time the banking industry of the country restructure into a setup with 59 scheduled banks of which 41 are private commercial banks, 6 are state-controlled commercial banks, 3 are specialized banks, and 9 are foreign bank branches.  Of the private commercial banks, 09 are Islamic banks, and several other banks are offering Islamic banking services using Islamic banking branches and windows. There are also five more institutions for pursuing special objectives but are not scheduled banks.

Bank branch expansion was very rapid for the government-owned banks in the first decade till 1980 mainly in the rural areas, as the then government was particularly eager to expand banking services in rural Bangladesh.  However, over the years the focus shifted from rural to urban banking with the growing market share of private commercial banks. Currently, the proportion of rural bank branches are below half and almost half of the bank branches are owned by the private commercial banks. Private commercial banks have even higher dominance in terms of assets, deposits, and advances. Rural deposits of banks started picking in recent years. Especially, the proportion of rural deposits increased remarkably in this decade, however, nine-tenth of the total outstanding credit has been in urban areas.  

The distribution of manpower employment and total income by the broad bank groups help indicate their contribution in employment generation, operational structure, processes, cost, and level of automation. With higher bank and branch set up, private commercial banks employed the highest number of employees followed by state-controlled commercial banks to run their banking operations. As of 2019-20, close to 2 lac employees were working with commercial banks operating in the country: private banks were 2.3 times bigger than state-controlled and 31 times bigger than foreign banks in terms of the number of manpower, whereas private banks were 3.8 times bigger than state-owned and 11 times bigger than foreign banks in terms of total income. Foreign banks were creating lower employment, but well-positioned in terms of efficient processes and automation.     

There is no doubt that banking sector of the country improved in terms of services, profitability, efficiency, and risk absorption capacity over the years. It is, however, not easy to capture and compare periodical and inter-bank group performance status of the banking activities of the country when their purposes, operational procedures are different. And, the estimation processes of certain indicators in line with the regulatory requirements changed over time. Though private and foreign banks have been consistently focusing on profit motives in their operations as commercial banking entities, the focuses and operational processes for state-controlled banks have mainly targeted attainment of national goals and priority sectors. Specialized banks have completely been mend for supporting priority sectors. However, despite notable improvement, banking sector of Bangladesh has challenges associated with the key indicators of financial health: non-performing loans and corporate governance practices.

There is no doubt that the banking industry has been playing remarkable role in supporting the economic growth movements of the country over the years. Banks have been engaged in short-term, medium-term, and long-term financing since inception, and have been playing roles of banks, non-bank financial institutions, and capital market single-handedly. Alongside offering payment and credit services in domestic business and economic activities, international trade and foreign exchange activities have increasingly been facilitated by the banking institutions of the country. Improvements in terms of performance indicators are visible and appreciable. However, challenges of the sector must not be ignored for ensuring greater and consistent contribution. Moreover, banking sector needs to handle Covid-19 situation efficiently for sustainable banking operation in the coming days.

For better future of the banking industry, we need to design multiple pressure elements for addressing willful default and undertake measures for supporting defaulters for genuine reasons.Growing number of market players in the financial market should ensure greater competition, efficiency, and innovation. The higher number of banks should ensure greater financial inclusion in a country where still a section of people remained out of the scope of banking services. The country requires an in-depth analysis of the relevant information on the developmental levels of small manufacturing clusters of the country. There should also be initiative and advocacy for setting up of regulatory authority for Warehouse Receipt Systems and a commodity exchange to support agricultural financing further.  Platforms like mobile and agent banking have received momentum in recent times in Bangladesh. Covid-19 outbreaks have proven the relevance and importance of these banking ventures. Especially, expansion move of agent banking is inspiring, and sustaining of the model might prove to be a remarkable force for reaching the rural vulnerable at reasonable cost. Alongside adoption of technology and promoting innovations, mapping shadow banking entities and activities based on certain regulatory criteria is the need of the time.  Development of other segments of the financial sector is also relevant for the sustainable banking operation of Bangladesh.

The banking sector however is fighting corona situation and supporting the government efforts for handling the crisis. It is high time for banks for reassessing existing policy and business strategy and to move beyond crisis management. A wide-ranging transformation covering human resources, organizational structure, governance, and culture might be on the card. It might include significant workplace transformation, renewed and remarkable boosts of IT and fin-tech, and moving towards comprehensive digitalization. Very importantly, if banks fail to reset with reshaped strategic approach during this Covid-19 crisis, trust from consumers, businesses, and the community could be at risk. Also, banks are expected to play leading roles in the country’s upcoming green financing and the green growth movements. For policy-making bodies, boards, and top management associated with banks, it is about shouldering greater responsibilities and reflecting accountability to the society for the sake of the long term business, economic and social benefits in this crisis environment.

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