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The Banking System of Bangladesh and Its Present Condition

Banking System of Bangladesh


The Banking System of Bangladesh and Its Present Condition

The banking sector of Bangladesh is one of the major contributors to the Bangladesh economy with the commercial sector playing a pivotal role in the financial sector. The banking industry in Bangladesh began with six nationalized commercialized banks, two state-owned specialized banks and three foreign banks after Bangladesh attained independence in 1971.  In the 1980s, the banking industry of  Bangladesh achieved significant development with the establishment of private banks. Since then, various other forms of financial institutions have been formed to reform the transaction system in Bangladesh. Currently, there are five major categories of banking in existence- Central Bank, State- owned Commercial Banks (SCBs), Private Commercial Banks (PCBs), Foreign Commercial Banks, Specialized Development Banks. Before delving further into these reformations, let us briefly look at the initiation of the banking system in Bangladesh.

Brief History
The first bank in Bangladesh was established in 1846, named as Dacca Bank. Its operations were limited and it did not engage in issuing banknotes. Dacca Bank was later purchased by Bank of Bengal in 1862 after which it opened its branches in Chittagong, Sirajganj (1873) and Chandpur (1900). After the partition of 1947, a total of six branches were in existence, additionally including Mymensingh, Narayanganj and Rangpur. During independence of 1971, the Bangladesh banking system consisted of two branch offices of the former State Bank of Pakistan and seventeen large commercial banks and there were fourteen smaller commercial banks.

Almost all the banking services were centered in the urban areas since initiation. The Dhaka branch of the State Bank of Pakistan was renamed as Bangladesh Bank and it was deemed as the central bank of the country, by the new independent government of Bangladesh. Bangladesh Bank was since then responsible for the majority of financial controls of most of the financial institutions of the country, including regulating currency, credit controlling, monetary policy, exchange control, foreign exchange reserves. The whole banking system including insurance services which were the source of investment funds were nationalized by the Bangladesh government while foreign-owned banks were permitted to continue doing business in Bangladesh.

Present Scenario
Presently, there are two forms of banks operating in Bangladesh, namely, Schedule Banks and Non-schedule banks. Banks operating under Bank Company Act, 1991 are categorized under Schedule Banks. State- owned commercial banks, private commercial banks, Islamic commercial banks, foreign commercial banks fall under this category. Banks established for distinct and specific objective and fall under non-schedule banks. They do not hold as much power as the schedule banks since they do not have all the functions present in schedule banks. Grameen Bank, Probashi Kallyan Bank, Karmasangsthan Bank, Progoti Co-operative Land Development Bank Limited (Progoti Bank) and Ansar VDP Unnayan Bank fall under this category. There are some Islamic Banks in operation as well six of which operate under Private Commercial Banks and ten conventional banks partially operate in this manner.

The commercial banks play a pivotal role in shaping Bangladesh’s economy through its contributions. Promotion of capital formation, investment opportunities in new ventures, promotion of trade and industry, agricultural development, promotion of economic activity, implementation of monetary policy, are some of the significant portrayals of commercial banks. In regards to establishment of banks in rural areas, much progress has not been made. As of 2012, there was a decrease from 57.94 percent to 57.20 percent of bank branches in rural areas. However, the percentage of banks in urban areas witnessed increases. The problem associated with banking sector is widespread and is not constricted to banking system only.

The independence and accountability of the regulatory body is still questionable and therefore calls for drastic improvement. As of June 2017, reports suggest, Tk20 Billion (US$250M) were allocated by the government to recapitalize Bangladesh state-owned banks as there have been problems resurfacing regarding regulators’ inefficiency to fix various related issues. Limited actions have been undertaken to penalize defaulters, improve risk management and strengthen bank management. In its latest Article IV report, the IMF has highlighted some underlying risks to the banking sector due to surplus liquidity. However, an improvement in conditions within the state-owned banking sector is dependent on government’s political will to focus on problems, which has been limited till date.

However, if the aforementioned problems are addressed and tackled well, new opportunities from the banking sector can arise.  Acceleration of expansion due to a high number of population, ability to meet global standards in terms of product quality, prospects for new global banks to start operation in Bangladesh, opportunity for the banking sector to become a major contributor in the national economy are some of the benefits that can be reaped, if opportunities are reaped strategically and problems handled tactfully.

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