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Term Paper On
Role of Commercial Banks for Economic Sustainability
1
Term Paper OnRole of Commercial Banks for
economic Sustainability(This Term paper is Submitted For the Partial Fulfillment of the Degree of
Executive master 0f Business Administration with a Major in Finance)
Submitted To:
Mr. Rajib DattaLecturer
Department of FinanceFaculty of Business Studies
Premier University
Submitted By
Student Name: Tarequl Islam Student ID: 1172140280
Program: EMBA Semester: 3rd Batch no: 07 Major: Finance
PREMIER UNIVERSITY CHITTAGONG
Date of Submission: 28-03-2014
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Letter of Transmittal
Date: March 28, 2014
ToThe Supervisor
Mr.Rajib DattaLecturer
Department of Finance
Faculty of Business Studies
Premier University
Chittagong, Bangladesh
Subject: Term Paper on “Role of Commercial Banks for economic Sustainability”
SirI am grateful to you for the submission of the Term paper on” Role of commercial bank for economic stability”. This is an excellent opportunity for me to acquaint more closely with the organization. The association and coordination of all respective officers & staffs with me are full of exciting, re-discovering and entertainment. During the period of doing this paper I have discovered and gained new & practical feelings, observations and learning. I have my utmost effort to reflect experience, skill and knowledge, which I acquired at the time of working.
I have tried my best to furnish the report with relevant data, which I have collected during
my period. I shall be glad if you kindly accept this report, and I am ready to explain
anything to you if you feel necessary.
Thanking youYours Faithfully
Name: Tarequl IslamStudent ID: 1172140280Program: EMBABatch: 07Semester: 3rdMajor in financePremier University Chittagong.
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AcknowledgementAt first I am very much grateful to Almighty God, who made me able to complete this
report. It is very difficult to express my feelings that helped me in completion of this
report. But I think there is no other word except thanks, which can compliment my
sentiments.
I pay gratitude to the Supervisor of my report, Mr. Rajib Datta , lecture of faculty of Business Studies, Premier University Chittagong. I also pay honor to the faculty members of Finance Department for their contribution.
Last but not the least, I am thankful to offices of different commercial banks and my
family and my friends who have been helpful by giving me their co-operation and efforts
in completing this report.
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Table of Contents
Title Page 1
Cover Page 2
Letter of Transmittal 3Acknowledgement 4
Table of contents 5
Executive Summary 6
Chapter (I) 7
Introduction 8-9
Statement of the problem 10
Objectives of the study 11
Brief overview 11
Chapter (II) 12
Literature review 13-22
Chapter (III)23
METHODOLOGY OF THE STUDY 24-34
Chapter (IV)35
Research Findings 36-38
LIMITATIONS OF THE STUDY 38-39
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Chapter (V) 40
Recommendation 41
Conclusion 42
References 43
Executive summary
In order to provide a student with job exposure and an opportunity of the
transition of theoretical knowledge into real life experience, an term paper is a
must. A better balance between theory & practice can be gained through this
program. Banking system of Bangladesh has gone through three phase of
development Nationalization, Privatization and Financial Sector Reform. National
Credit and Commerce Bank is the largest Private Commercial Bank from 1993
with new hope and promise to serve the countrymen. A sustainable economy
generates the capital necessary for growth as well as that necessary to support the
current needs of the community. The goal of achieving sustainable economic
vitality is to establish an economy with sufficient jobs, products, and services to
support the community. It is clear that exploiting human or natural resources will
not provide a sustainable economic plan. Similarly, too much spending on
employee benefits and environmental protection will undermine economic
stability. The economic plan in a sustainable community must therefore balance
the allocation of resources between society, business and the environment.
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Chapter (I)
7
Introduction
Banks are essential for each country’s economy, since no growth can be achieved unless
savings are efficiently channeled into investment. In this respect, the lack of a full-
fledged banking system has often been identified as a major weakness of the centrally
planned economies. Therefore, reforming the banking sector in the former communist
countries and creating a new culture of trust and confidence has been a crucial task in the
process of transition to a market economy.
Banking system and the financial institutions play very significant role in the economy.
The health of eth economy is closely related to the soundness of its banking system.
Although banks create no new wealth but their borrowing, lending & related activities
facilitates the process of production, distribution, exchange & consumption of wealth. In
this way they become very effective partners in the process of economic development.
Today modern banks are very useful for the utilization of the resources of the country.
The banks are mobilizing the savings of the people for the investment purposes. If there
would be no bank then a great position of the capital of a economy would remain idle.
A bank as a matter of fact is just like a heart in the economic structure and the capital by
it is like blood in it. As long as the blood will be in circulation, the organs will remain
sound and healthy. If the blood is not supplied to any organ then that part would become
inactive. So if financing is not made in industrial or agricultural sectors, these sectors will
be destroyed. Loan facilities provided by banks work as an incentive to the producer to
increase their production. Many difficulties in the international payments have been
overcome and the volumes of transaction have been increased. The modern economies in
the world have been developed primarily by making the best use of the credit availability
in their systems. An efficient banking system must cater to the needs of high end
investors by making available high amounts of capital for big projects in the industrial,
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infrastructures & service sectors. At the same time credit should be made available to the
medium & small ventures.
Development of banking sector is the key to improve the financial condition of a country.
Moreover not only the economy or the financial sector but also all the sectors of a
country are directly or indirectly related to the smooth operation of banking sector.
Let’s analyze some of the key factors which are affected by the banking sector of a
country:
An effective commercial banking system makes the credit available to the
entrepreneurs. The entrepreneurs use the credit to produce goods and services. As a
result they can contribute to the growth of the economy.
Mobilization of resources would only be possible if new branches of banks are
opened in both urban and rural areas. This would open doors to the external world
which means development in all aspects.
Banks finance new & innovative ideas. In this way they accelerate the economic
growth.
Banks offer credit facilities which are the driving force for any business project to be
put into action. In a developing nation such as Bangladesh where in agriculture is
main livelihood for a major part of the population, investing in such sectors is of
highly important. So banks can play a vital role for the development of agriculture by
investing in agricultural projects.
Banks are the sources of loans and advances.
The world would come to a standstill if the banks cease their operation. However the
banks are just one aspect of a nation’s financial sector, although the most important one!
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Statement of the Problem
It is a known fact that banks play several vital roles in any economy. And these roles are aimed at ensuring sound financial system and economic stability. It is incontrovertible that the banking system is the engine of growth in any economy, given its function of financial intermediation. Through this function, banks facilitate capital formation, lubricate the production engine turbines and promote economic growth. However, banks’ ability to engender economic growth and development depends on the health, soundness and stability of the banking system itself. The need for a strong, reliable and viable banking system is underscored by the fact that the industry is one of the few sectors in which the shareholders’ fund is only a small proportion of the liabilities of the enterprise. It is, therefore, not surprising that the banking industry is one of the most regulated sectors in any economy. Yet it has been argued in the public domain that the commercial banks have not been performing the desired roles in improving capital formation and promoting economic growth in the country.
Capital formation refers to the net addition to the capital stock after of any nation after depreciation. It is defined as an addition to stock of capital assets set aside for future productive endeavours in real sector which will lead to more growth in physical capital assets of the country. Capital formation captures all the real-value-added to the economy in real-asset-terms which will lead to further enhancement of savings, investment and generation of more wealth in future. Capital formation derives from savings accumulation. It has a positive impact on private savings accumulation in the sense that increase in capital formation will lead to more savings. When savings accumulate it will lead to an increase in gross domestic investment (GDI) and income generated as a result of the investment projects made will, in turn, lead to GDP growth [7, 356-367].Now, the supposed relationship between banking, capital formation and economic growth is that banking through its activities such as savings and deposit mobilization, credit creation, etc increases the accumulation of capital formation which in turn is expected to enhance economic of the country.
Objectives of the Study
The central objective of the study is to empirically investigate the role of Nigerian banks in Capital Formation and economic growth. The specific objectives are as follows:
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i. To analyze the impact of banks’ deposit mobilization on capital formation and economic growth in Bangladesh.
ii. To investigate the impact of other banks’ performance indicators such as credits to the economy and banks investment on Bangladesh economic growth.
iii. To determine the association existing between capital formation and economic growth in Bangladesh.
iv. To evaluate the role banks have played in mobilizing gross domestic savings towards filling the existing savings - investment gap in a bid to achieve desired investment goals and/or growth objectives in the years ahead.
Brief Overview
To presentation of the report is proper order of arrangement. This paper is divided in to five parts. In the first part introduction of the paper has been placed. Literature review and strategy management has been described in the section one. In the third part, special reference to Banking sector. The industry situation of banking business has been described in this section and comparative status of some prominent origination is portrayed. Findings of the study are also described in the fifth section. At last, based on the findings conclusion and recommendation was given.
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Chapter (II)
12
Role of Central Bank in Economic DevelopmentThe central bank in a developing country aims at the promotion and maintenance of a
rising level of production, employment and real income in the country. The central banks
in the majority of underdeveloped countries have been given wide powers to promote the
growth of such economies. They, therefore, perform the following functions towards this
end.
Creation and Expansion of Financial InstitutionsOne of the aims of a central bank in an underdeveloped country is to improve its currency
and credit system. More banks and financial institutions are required to be set up to
provide larger credit facilities and to divert voluntary savings into productive channels.
Financial institutions are localised in big cities in underdeveloped countries and provide
credit facilities to estates, plantations, big industrial and commercial houses.
In order to remedy this, the central bank should extend branch banking to rural areas to
make credit available to peasants, small businessmen and traders. In underdeveloped
countries, the commercial banks provide only short-term loans. Credit facilities in rural
areas are mostly non-existent. The only source is the village moneylender who charges
exorbitant interest rates.
The hold of the village moneylender in rural areas can be slackened if new institutional
arrangements are made by the central bank in providing short-term, medium term and
long-term credit at lower interest rates to the cultivators. A network of co-operative credit
societies with apex banks financed by the central bank can help solve the problem.
Similarly, it can help the establishment of lead banks and through them regional rural
banks for providing credit facilities to marginal farmers, landless agricultural workers and
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other weaker sections. With the vast resources at its command, the central bank can also
help in establishing industrial banks and financial corporations in order to finance large
and small industries.
Proper Adjustment between Demand for and Supply of MoneyThe central bank plays an important role in bringing about a proper adjustment between
demand for and supply of money. An imbalance between the two is reflected in the price
level. A shortage of money supply will inhibit growth while an excess of it will lead to
inflation. As the economy develops, the demand for money is likely to go up due to
gradual monetization of the non-monetized sector and the increase in agricultural and
industrial production and prices.
The demand for money for transactions and speculative motives will also rise. So the
increase in money supply will have to be more than proportionate to the increase in the
demand for money in order to avoid inflation. There is, however, the likelihood of
increased money supply being used for speculative purposes, thereby inhibiting growth
and causing inflation.
The central bank controls the uses of money and credit by an appropriate monetary
policy. Thus in an underdeveloped economy, the central bank should control the supply
of money in such a way that the price level is prevented from rising without affecting
investment and production adversely.
A Suitable Interest Rate PolicyIn an underdeveloped country the interest rate structure stands at a very high level. There
are also vast disparities between long-term and short-term interest rates and between
interest rates in different sectors of the economy. The existence of high interest rates acts
as an obstacle to the growth of both private and public investment, in an underdeveloped
economy.
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A low interest rate is, therefore, essential for encouraging private investment in
agriculture and industry. Since in underdeveloped country businessmen have little
savings out of undistributed profits, they have to borrow from the banks or from the
capital market for purposes of investment and they would borrow only if the interest rate
is low. A low interest rate policy is also essential for encouraging public investment. A
low interest rate policy is a cheap money policy. It makes public borrowing cheap, keeps
the cost of servicing public debt low and thus helps in financing economic development.
In order to discourage the flow of resources into speculative borrowing and investment,
the central bank should follow a policy of discriminatory interest rates, charging high
rates for non-essential and unproductive loans and low rates for productive loans. But this
does not imply that savings are interest-elastic in an underdeveloped economy.
Since the level of income is low in such economies, a high rate of interest is not likely to
raise the propensity to save. In the context of economic growth, as the economy develops,
a progressive rise in the price level is inevitable. The value of money falls and the
propensity to save declines further. Money conditions become tight and there is a
tendency for the rate of interest to rise automatically. This would result in inflation. In
such a situation any effort to control inflation by raising the rate of interest would be
disastrous. A stable price level is, therefore, essential for the success of a low interest rate
policy which can be maintained by following a judicious monetary policy by the central
bank.
Debt ManagementDebt management is one of the important functions of the central bank in an
underdeveloped country. It should aim at proper timing and issuing of government bonds,
stabilizing their prices and minimizing the cost of servicing public debt. It is the central
bank which undertakes the selling and buying of government bonds and making timely
changes in the structure and composition of public debt.
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In order to strengthen and stabilize the market for government bonds, the policy of low
interest rates is essential. For, a low rate of interest raises the price of government bonds,
thereby making them more attractive to the public and giving an impetus to the public
borrowing programmes of the government. The maintenance of structure of low interest
rates is also called for minimizing the cost of servicing the national debt.
Further, it encourages funding of debt by private firms. However, the success of debt
management would depend upon the existence of well-developed money and capital
markets in which wide range of securities exist both for short and long periods. It is the
central bank which can help in the development of these markets.
Credit ControlCentral Bank should also aim at controlling credit in order to influence the patterns of
investment and production in a developing economy. Its main objective is to control
inflationary pressures arising in the process of development. This requires the use of both
quantitative and qualitative methods of credit control.
Open market operations are not successful in controlling inflation in underdeveloped
countries because the bill market is small and undeveloped. Commercial banks keep an
elastic cash-deposit ratio because the central bank’s control over them is not complete.
They are also reluctant to invest in government securities due to their relatively low
interest rates.
Moreover, instead of investing in government securities, they prefer to keep their reserves
in liquid form such as gold, foreign exchange and cash. Commercial banks are also not in
the habit of rediscounting or borrowing from the central bank.
The bank rate policy is also not so effective in controlling credit in LDCs due to: (a) the
lack of bills of discount; (b) the narrow size of the bill market; (c) a large non-monetised
sector where barter transactions take place; (d) the existence of a large unorganised
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money market; (e) the existence of indigenous banks which do not discount bills with the
central banks; and (f) the habit of commercial banks to keep large cash reserves.
The use of variable reserve ratio as method of credit control is more effective than open
market operations and bank rate policy in LDCs. Since the market for securities is very
small, open market operations are not successful. But a rise or fall in the reserve ratio by
the central bank reduces or increases the cash available with the commercial banks
without affecting adversely the prices of securities.
Again, the commercial banks keep large cash reserves which cannot be reduced by a raise
in the bank rate or sale of securities by the central bank. But raising the cash-reserve ratio
reduces liquidity with the banks. However, the use of variable reserve ratio has certain
limitations in LDCs.
First, the non-banking financial intermediaries do not keep deposits with the central bank
so they are not affected by it. Second, banks which do not maintain excess liquidity are
not affected than those who maintain it.
The qualitative credit control measures are, however, more effective than the quantitative
measures in influencing the allocation of credit, and thereby the pattern of investment. In
underdeveloped countries, there is a strong tendency to invest in gold, jewellery,
inventories, real estate, etc., instead of in alternative productive channels available in
agriculture, mining, plantations and industry.
The selective credit controls are more appropriate for controlling and limiting credit
facilitates for such unproductive purposes. They are beneficial in controlling speculative
activities in food-grains and raw materials. They prove more useful in controlling
‘sectional inflations’ in the economy.
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They curtail the demand for imports by making it obligatory on importers to deposit in
advance an amount equal to the value of foreign currency. This has also the effect of
reducing the reserves of the banks in so far as their deposits are transferred to the central
banks in the process. The selective credit control measures may take the form of
changing the margin requirements against certain types of collateral, the regulation of
consumer credit and the rationing of credit.
Solving the Balance of Payments ProblemThe central bank should also aim at preventing and solving the balance of payments
problem in a developing economy. Such economies face serious balance of payments
difficulties to fulfil the targets of development plans. An imbalance is created between
imports and exports which continue to widen with development.
The central bank manages and controls the foreign exchange of the country and also acts
as the technical adviser to the government on foreign exchange policy. It is the function
of the central bank to avoid fluctuations in the foreign exchange rates and to maintain
stability. It does so through exchange controls and variations in the bank rate. For
instance, if the value of the national currency continues to fall, it may raise the bank rate
and thus encourage the inflow of foreign currencies.
Commercial Banks: 7 Important Role of Commercial Banks in a Developing Country
Some of the major important role of commercial banks in a developing country are as
follows:
Besides performing the usual commercial banking functions, banks in developing
countries play an effective role in their economic development. The majority of people in
such countries are poor, unemployed and engaged in traditional agriculture.
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There is acute shortage of capital. People lack initiative and enterprise. Means of
transport are undeveloped. Industry is depressed. The commercial banks help in
overcoming these obstacles and promoting economic development. The role of a
commercial bank in a developing country is discussed as under.
1. Mobilising Saving for Capital Formation:
The commercial banks help in mobilising savings through network of branch banking.
People in developing countries have low incomes but the banks induce them to save by
introducing variety of deposit schemes to suit the needs of individual depositors. They
also mobilise idle savings of the few rich. By mobilising savings, the banks channelise
them into productive investments. Thus they help in the capital formation of a developing
country.
2. Financing Industry:
The commercial banks finance the industrial sector in a number of ways. They provide
short-term, medium-term and long-term loans to industry. In India they provide short-
term loans. Income of the Latin American countries like Guatemala, they advance
medium-term loans for one to three years. But in Korea, the commercial banks also
advance long-term loans to industry.
In India, the commercial banks undertake short-term and medium-term financing of small
scale industries, and also provide hire- purchase finance. Besides, they underwrite the
shares and debentures of large scale industries. Thus they not only provide finance for
industry but also help in developing the capital market which is undeveloped in such
countries.
3. Financing Trade:
The commercial banks help in financing both internal and external trade. The banks
provide loans to retailers and wholesalers to stock goods in which they deal. They also
help in the movement of goods from one place to another by providing all types of
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facilities such as discounting and accepting bills of exchange, providing overdraft
facilities, issuing drafts, etc. Moreover, they finance both exports and imports of
developing countries by providing foreign exchange facilities to importers and exporters
of goods.
4. Financing Agriculture:
The commercial banks help the large agricultural sector in developing countries in a
number of ways. They provide loans to traders in agricultural commodities. They open a
network of branches in rural areas to provide agricultural credit. They provide finance
directly to agriculturists for the marketing of their produce, for the modernisation and
mechanisation of their farms, for providing irrigation facilities, for developing land, etc.
They also provide financial assistance for animal husbandry, dairy farming, sheep
breeding, poultry farming, pisciculture and horticulture. The small and marginal farmers
and landless agricultural workers, artisans and petty shopkeepers in rural areas are
provided financial assistance through the regional rural banks in India. These regional
rural banks operate under a commercial bank. Thus the commercial banks meet the credit
requirements of all types of rural people.
5. Financing Consumer Activities:
People in underdeveloped countries being poor and having low incomes do not possess
sufficient financial resources to buy durable consumer goods. The commercial banks
advance loans to consumers for the purchase of such items as houses, scooters, fans,
refrigerators, etc. In this way, they also help in raising the standard of living of the people
in developing countries by providing loans for consumptive activities.
6. Financing Employment Generating Activities:
The commercial banks finance employment generating activities in developing countries.
They provide loans for the education of young person’s studying in engineering, medical
and other vocational institutes of higher learning. They advance loans to young
20
entrepreneurs, medical and engineering graduates, and other technically trained persons
in establishing their own business. Such loan facilities are being provided by a number of
commercial banks in India. Thus the banks not only help inhuman capital formation but
also in increasing entrepreneurial activities in developing countries.
7. Help in Monetary Policy:
The commercial banks help the economic development of a country by faithfully
following the monetary policy of the central bank. In fact, the central bank depends upon
the commercial banks for the success of its policy of monetary management in keeping
with requirements of a developing economy.
Thus the commercial banks contribute much to the growth of a developing economy by
granting loans to agriculture, trade and industry, by helping in physical and human capital
formation and by following the monetary policy of the country.
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Chapter(III)
23
METHODOLOGY OF THE STUDY
Specific procedure:
Information collected to furnish this report is both from primary and secondary in
nature. The secondary information was collected from the different publication,
and books.
The report is prepared using qualitative research method. The data were relatively
disorganized and collected based on our limited knowledge.
The report has been prepared based on secondary data such as-the published
reports, various articles, and related documents as well as down loaded data from website
through internet. I have studied the sources of information, then all these reports and
documents are also been analyzed and organized to make report possible according to the
topic.
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Private Commercial Banks: Bangladesh Context:
The banking system at independence consisted of two branch offices of the former State
Bank of Pakistan and seventeen large commercial banks, two of which were controlled
by Bangladeshi interests and three by foreigners other than West Pakistanis. There were
fourteen smaller commercial banks. Virtually all banking services were concentrated in
urban areas. The newly independent government immediately designated the Dhaka
branch of the State Bank of Pakistan as the central bank and renamed it the Bangladesh
Bank. The bank was responsible for regulating currency, controlling credit and monetary
policy, and administering exchange control and the official foreign exchange reserves.
The Bangladesh government initially nationalized the entire domestic banking system
and proceeded to reorganize and rename the various banks. Foreign-owned banks were
permitted to continue doing business in Bangladesh. The insurance business was also
nationalized and became a source of potential investment funds.
Cooperative credit systems and postal savings offices handled service to small individual
and rural accounts. The new banking system succeeded in establishing reasonably
efficient procedures for managing credit and foreign exchange.
The primary function of the credit system throughout the 1970s was to finance trade and
the public sector, which together absorbed 75 percent of total advances.
The government's encouragement during the late 1970s and early 1980s of agricultural
development and private industry brought changes in lending strategies. Managed by the
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Bangladesh Krishi Bank, a specialized agricultural banking institution, lending to farmers
and fishermen dramatically expanded. The number of rural bank branches doubled
between 1977 and 1985, to more than 3,330. Denationalization and private industrial
growth led the Bangladesh Bank and the World Bank to focus their lending on the
emerging private manufacturing sector. Scheduled bank advances to private agriculture,
as a percentage of sectoral GDP, rose from 2 percent in FY 1979 to 11 percent in FY
1987, while advances to private manufacturing rose from 13 percent to 53 percent.
The transformation of finance priorities has brought with it problems in administration.
No sound project-appraisal system was in place to identify viable borrowers and projects.
Lending institutions did not have adequate autonomy to choose borrowers and projects
and were often instructed by the political authorities. In addition, the incentive system for
the banks stressed disbursements rather than recoveries, and the accounting and debt
collection systems were inadequate to deal with the problems of loan recovery. It became
more common for borrowers to default on loans than to repay them; the lending system
was simply disbursing grant assistance to private individuals who qualified for loans
more for political than for economic reasons. The rate of recovery on agricultural loans
was only 27 percent in FY 1986, and the rate on industrial loans was even worse. As a
result of this poor showing, major donors applied pressure to induce the government and
banks to take firmer action to strengthen internal bank management and credit discipline.
As a consequence, recovery rates began to improve in 1987.
The National Commission on Money, Credit, and Banking recommended broad structural
changes in Bangladesh's system of financial intermediation early in 1987, many of which
were built into a three-year compensatory financing facility signed by Bangladesh with
the IMF in February 1987.
One major exception to the management problems of Bangladeshi banks was the
Grameen Bank, begun as a government project in 1976 and established in 1983 as an
independent bank. In the late 1980s, the bank continued to provide financial resources to
the poor on reasonable terms and to generate productive self-employment without
external assistance. Its customers were landless persons who took small loans for all
26
types of economic activities, including housing. About 70 percent of the borrowers were
women, who were otherwise not much represented in institutional finance. Collective
rural enterprises also could borrow from the Grameen Bank for investments in tube wells,
rice and oil mills, and power looms and for leasing land for joint cultivation. The average
loan by the Grameen Bank in the mid-1980s was around Tk2,000 (US$65), and the
maximum was just Tk18,000 (for construction of a tin-roof house). Repayment terms
were 4 percent for rural housing and 8.5 percent for normal lending operations.
The Grameen Bank extended collateral-free loans to 200,000 landless people in its first
10 years. Most of its customers had never dealt with formal lending institutions before.
The most remarkable accomplishment was the phenomenal recovery rate; amid the
prevailing pattern of bad debts throughout the Bangladeshi banking system, only 4
percent of Grameen Bank loans were overdue. The bank had from the outset applied a
specialized system of intensive credit supervision that set it apart from others. Its success,
though still on a rather small scale, provided hope that it could continue to grow and that
it could be replicated or adapted to other development-related priorities. The Grameen
Bank was expanding rapidly, planning to have 500 branches throughout the country by
the late 1980s.
Beginning in late 1985, the government pursued a tight monetary policy aimed at limiting
the growth of domestic private credit and government borrowing from the banking
system. The policy was largely successful in reducing the growth of the money supply
and total domestic credit. Net credit to the government actually declined in FY 1986. The
problem of credit recovery remained a threat to monetary stability, responsible for serious
resource misallocation and harsh inequities. Although the government had begun
effective measures to improve financial discipline, the draconian contraction of credit
availability contained the risk of inadvertently discouraging new economic activity.
Foreign exchange reserves at the end of FY 1986 were US$476 million, equivalent to
slightly more than 2 months worth of imports. This represented a 20-percent increase of
reserves over the previous year, largely the result of higher remittances by Bangladeshi
workers abroad. The country also reduced imports by about 10 percent to US$2.4 billion.
27
Because of Bangladesh's status as a least developed country receiving concessional loans,
private creditors accounted for only about 6 percent of outstanding public debt. The
external public debt was US$6.4 billion, and annual debt service payments were US$467
million at the end of FY 1986.
In March 1987 Bangladseh Krishi Bank was bifurcated and another specialized bank
emerged as Rajshai Krishi Unnayan Bank for Rajshai Division. Bank of Small Industries
and Commerce Ltd. (BASIC) started its operation as a private bank from September
1988. Later on BASIC was brought under direct control of the government and was
reckoned as a specialized bank with effect from June 1993. From July 1995 again BASIC
was categorized as a 100% state owned bank. In 1997, Government decided to treat this
bank as a specialized bank again. So in it booklet, the BASIC has been treated as a
specialized bank.
Now the commercial banking system dominates Bangladesh’s financial sector.
Bangladesh Bank is the central bank of Bangladesh and the chief regulatory authority in
the sector. Its prime jobs include issuing of currency, maintaining foreign exchange
reserve and providing transaction facilities of all public monetary matters. BB is
responsible for planning the government’s monetary policy and implementing it thereby.
The banking system is composed of four state owned commercial banks, five specialized
development banks, thirty private commercial banks and nine foreign commercial banks.
In 2012, the central bank has taken a decision to give licenses to six private banks and
two NRB Banks.
The new private banks are:
Union Bank.
Midland Bank.
Madhumati Bank.
Farmers’ Bank.
South Bangla Agriculture and Commerce Bank.
28
Maghna Bank.
Number of Banks in Bangladesh:
The banking system of Bangladesh is dominated by the 4 Nationalized Commercial
Banks in which 2 is totally controlled by government and 2 (Rupali Bank & Janata Bank)
are controlled by both government and private sector which to gather controlled about
54% of deposits and operated 7536 branches ( 54% of the total ) as of December 31,
2010.
The nationalized commercial banks are:
Sonali Bank Ltd.
Agrani Bank Ltd.
Rupali Bank Ltd.
Janata Bank ltd.
Services provided by nationalized banks are stated below:
Personal Banking.
Corporate Banking.
Project Finance.
SME Finance.
Consumer Credit.
International Banking.
Trade Finance.
Loan Syndication.
Foreign Exchange Dealing.
Rural and Micro Credit.
29
NGO-Linkage Loan.
Investment.
Government Treasury Function.
Money Market Operation.
Capital Market Operation.
Foreign Remittance.
Private Commercial Banks:
These types of banks are regulated by Bangladesh Bank. Private Banks are the highest
growth sector due to the dismal performance of government banks above. They tend to
offer better services and products. Now 32 private commercial banks are running their
operations in Bangladesh. A list of private commercial banks operating in Bangladesh
has been placed in ‘Appendix-B’.
The main services provided by these banks are stated below:
Retail Banking.
Corporate Banking.
SME Banking.
NRB Banking.
Investment Banking.
Merchant accounts and merchant banking services.
Project Finance.
Loan Syndication.
Money Transfer.
Custodial Services.
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Brokerage Services.
Locker Service.
Foreign Commercial Banks:
Now 10 Foreign Commercial banks are running their operations in Bangladesh. These
banks are also providing modern banking facilities to their clients. A list of foreign
commercial banks operating in Bangladesh has been placed in ‘Appendix-B’.
Development Banks:
A list of development banks or specialized banks operating is given below:
Bangladseh Krishi Bank.
Rajshahi Krishi Unnayan Bank.
Bangladesh Development Bank Limited.
Bank of Small Industries and Commerce.
Other specialized banks are:
Ansar VDP Unnayan Bank.
Bangladseh Samabai Bank Ltd.
Grameen Bank.
Karmasansthan Bank
Responsibility for Bangladesh as a production centerThe supply of loans to small and medium-sized companies, the backbone of economy of a country economy, is inadequate. Expansion and consolidation loans are subject to unrealistically high-risk premiums when they are available at all. Small and medium-sized companies pay the price for completely exaggerated expectations in terms of yield in the boom-and-bust cycles of the international capital markets. Labor- and energy intensive companies both in the small-trade and the industrial sector are not capable of generating double-digit yields.The severe losses in the real-estate sector in the 1980s have caused banks to develop a veritable risk aversion. Small and medium-sized companies suffer most from this. Even though by now some commendable efforts have been made, too few banks have done away with the centralized credit checking that was introduced as a result. Small and
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medium-sized companies can only be given the service they need locally, with a knowledge of local structures and the personality of the owner.2. Responsibility for risk managementnThe highest cluster risks are no longer to be found within the sphere of small and medium-sized companies. With the globalization of the financial markets, more and more banks are becoming increasingly involved in ever more risky areas of business.3. Responsibility as an employerThe banks are relatively progressive employers in terms of both salary and social fringebenefits, one reason being that their added value is so great.4. Responsibility for sustainable economic development and good governanceIn today’s financial industry, there is a blurred line between healthy competition and rapacious greed combined with criminal energy. The latter is a great risk for financial institutions as well as the economy. Checks and risk management are one remedy, but even more important is a comprehensive reform of the entire economic system. What I mean is a reorientation focusing on sustainability. In this context, the banks must play a key role as financial intermediaries.5. Responsibility in the globalized financial marketsAny further liberalization of the financial markets without international regulations and with a lack of supervisory authorities would increase the economy’s susceptibility to crises such as those of Asia, Russia and Argentina.Modern Day RoleThe financial system of Bangladesh consists of Bangladesh Bank (BB) as the central bank, 4 State Owned Commercial Banks (SCB), 5 government owned specialized banks, 30 domestic private banks, 9 foreign banks and 29 non-bank financial institutions. Moreover, MRA has given license to 298 Micro-credit Organizations. The financial system also embraces insurance companies, stock exchanges and co-operative banks.Banking system and the Financial Institutions play very significant role in the economy. First and foremost is in the form of catering to the need of credit for all the sections of society. The modern economies in the world have developed primarily by making best use of the credit availability in their systems. An efficient banking system must cater to the needs of high end investors by making available high amounts of capital for big projects in the industrial, infrastructure and service sectors. At the same time, the medium and small ventures must also have credit available to them for new investment and expansion of the existing units. Rural sector in a country like India can grow only if cheaper credit is available to the farmers for their short and medium term needs.While the commercial banks cater to the banking needs of the people in the cities and towns, there is another category of banks that looks after the credit and banking needs of the people living in the rural areas, particularly the farmers. Regional Rural Banks (RRBs) have been sponsored by many commercial banks in several States. These banks, along with the cooperative banks, take care of the farmer-specific needs of credit and other banking facilities.
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Lending and deposit businessA bank’s role as an “intermediary” is clearest in the credit and deposit business. Clients “bring” to the bank their savings, i.e. the money they have chosen not to spend. The bank transfers this money to its credit clients in the form of loans. What is on the face of it extremely simple is nevertheless fraught with a great many risks. A bank’s loans lack liquidity, either partially or totally. This means that the bank cannot sell them in return for demand deposits or central bank funds whenever it likes. On top of this, a borrower’s credit rating may change during the life of a loan, thereby changing the value of the loan at that point in time, which reflects the interest and amortization payments expected in the future. Due to the lack of a secondary market, credits are mostly carried in balance sheets at their nominal value, with provisions and write-offs only being formed or effected if there are any indications that the borrower may have trouble meeting payments or is actually in arrears. In some cases, credits may even become entirely worthless if borrowers become insolvent and bankrupt.Securities issuingThe universal banks active in the issuing sector face a whole range of potential conflicts of interest, given that issues often involve various parties from within and outside the bank and that these parties are not motivated by the same interests: the issuance unit is interested in the offering, securities trading is looking for high revenues, asset management clients expect the bank to safeguard their interests irrespective of its role in the issuing transaction, the lending unit may have information on the issuer that is otherwise not in the public domain, etc. Defusing and controlling potential conflicts such as these places enormous demands on a bank’s organizational structure, processes and compliance activities. Only when a bank succeeds in controlling the potential conflicts and managing them on a transparent basis can the different stakeholders involved be sure that their legitimate interests are equitably upheld.Asset managementAsset management covers a range of banking activities: portfolio management, investment advisory, securities trading and lending business (collateral loans, securities lending and borrowing). With a discretionary portfolio management agreement, clients authorize a bank to undertake, for their account and at their risk, all the actions it deems appropriate within the framework of the normal asset management activities of a bank. Clients expect their assets to be managed professionally and in their best interests. The bank contracts to exercise its undertaking to the best of its knowledge and abilities, taking into account clients’ circumstances but acting as it sees fit within the scope outlined as part of the investment goals defined with the client.Foreign exchange tradingThe last business I mentioned was foreign exchange trading, an activity which has been unjustly attacked as “casino capitalism”. Various factors have given rise to this perception. First, without a doubt the massive amounts traded in the foreign exchange markets every day. According to figures from the Swiss National Bank, for example, in
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April 2001 foreign exchange trades in Bangladesh alone amounted to CHF 121 billion each working day. (For the purposes of comparison, the global figure was USD 1,210 billion.) The vast majority of this trading takes place between financial intermediaries, the aim being to exploit even the slightest differences between exchange rates (arbitrage). Only a very small proportion of this trade issued to finance foreign trade and hedge foreign currency positions. Furthermore, the fact that serious economic crises such as the one Argentina is experiencing at present are almost always currency crises may fuel suspicions that it is currency traders with their speculative attacks that trigger such developments.nIn fact, the very opposite is true. Many people may fail to see the point of the vast amounts of arbitrage transactions, since they are not primarily used for financing purposes. In reality, however, they underpin liquidity in the markets, thus helping them to function smoothly. In less liquid markets, new information would inevitably lead to much greater volatility in rates. A distinction has to be made in the case of protracted currency over- or undervaluation’s (in terms of interest rates and purchasing power parity), which are a genuine problem, as they could result in the misallocation of resources.The scope available to banksNevertheless, the economic benefits generated by a bank are basically no different from the economic benefits generated by a doctor, teacher or train driver: by exercising, to the best of their knowledge and abilities, their specialist function in competition with others, companies and their employees make their contribution to economic benefit. And their motivation need not be a selfless one. Pilots do not fly planes to generate economic benefit, just as bankers do not grant credits for any such selfless reasons. Economic utility is created as a “by-product” anywhere women and men function successfully, and this does not apply solely to their jobs.Even though a banker grants loans to many companies and sectors of the economy, this does not mean he can do their work or bear their responsibilities.The argument of economic goals and responsibility is generally seized on by politicians when it is a matter of re-distributing capital, risks, profits or costs.Although not strictly wrong, the economic responsibility argument has the major political advantage that it can be flexibly deployed for absolutely anything. You will look long and hard – and probably in vain – for any “handy” definition of a bank’s economic responsibility that is at the same time general enough. Which is why my suggestion is the following: bankers act responsibly when they ensure that their house is in order and resist the temptation to pass off poor financial performance as a contribution to the economy.
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Chapter(IV)
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Research Findings:
Contribution Of The Banking Sector To The Economy Of Bangladesh
Bangladesh appeared as a new nation on the world map in the year1971. After
independence financial institutions, especially banks played a vital role in re-constructing
the war – torn economy of Bangladesh. The Bangladesh banking sector relative to the
size of its economy is comparatively larger than many economies of similar level of
development and per capita income. The total size of the sector at 26.54% of GD
dominates the financial system, which is proportionately large for a country with a per
capita income of only about US$370. The non-bank financial sector, including capital
market institutions is only 3.22% of GDP, which is much smaller than the banking sector.
Commercial banks as the most important functionary of the financial system play a
dynamic role in economic development of the country by providing funds to various
economic sectors like agriculture, industry, power, transport, trade service etc. In mid 80s
Banking & insurance contributed 1.69% of GDP and gradually the figure was increasing.
In the year its contribution to the GDP was 2.09%. Again the sector makes a positive
impact on the economic development of this country by creating employment opportunity
for people. In the year 1980 total number of employees in this sector was 59235 but
within 15 years of time the figure became approximately double to 101,444. The average
growth rate of employment generation was 3.76% (1980-1995).
Countries like Bangladesh have abundance of unemployment, where as banking sector
still keep certain impact on employment generation. Branches of the banks are also
growing significantly. In early 80s for the first time the Government of Bangladesh
(GOB) allowed private sector to operate commercial banks. At that time number of bank
branches was growing rapidly. The number of banks has grown from 17 in 1980 to 47 in
2010 and the number of branches was about 7700. Individuals and business organizations
deposit their savings in the bank and borrow money from it. There are 53 bank branches
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per 1000 square km. in Bangladesh as compared with 10 in Pakistan and 24 in India.
There is one bank branch for every 20000 people in Bangladesh as compared with 20340
people per branch in Pakistan and 14485 people in India. Commercial banks are one of
the profit making institutions. They are also making money by investing their deposits to
the profitable ventures through lending to entrepreneurs. Commercial banks earn money
through interest, commission & service charges for the services and it also incurred
expenditures as well. Banks’ income is generated by the effort of their employees.
Efficient employees can earn more which observed a positive impact to profit generation.
Income per employee can be one of the indicators of commercial banks’ performances.
Average income per employee from 1980 to 1995 was Tk. 277046, i.e. per employee’s
contribution to income more than Tk. 2 lacs. The ratio was increasing significantly with
the average growth rate of 12% to Tk. 371,297 in the year 1995.
A country leads itself to the economic development by investing and producing more in
the local area. Investment can be ensured through increased savings rate. Monetization
ratio indicates a positive impact to the economic growth. This ratio is Broad Money to
GDP. Average monetization ratio was 28% of GDP, and it was growing significantly
from 17% in the year 1981 to 35% in the year 1995.Commercial banks as a whole
performing well and contributing to the economic development of the country. The
average profitability of all banks collectively was 0.09% during 1980 to 1995, which
means profit Tk. 0.09 earned by utilizing assets of Tk. 100. Total operating profits of all
commercial banks stood at Tk. 197.38 billion by end of December 31, 2011, BB data
showed.
The banks however, earned Tk. 91.21 billion as net profit in 2011 after adjustment of
their requirements for provisioning against bad debts and also making provision for tax
payments, worth Tk. 33.35 billion and Tk. 72.62 billion respectively. In every aspect of
profit, banking sector contributes to national economy as well as to the individual
organization. Despite overall growth of the banking sector was positive, but the
performances of different categories of banks were not equally attractive.
The banking sector especially the private sector banks made significant progress and
growth in terms of significant market share of deposits and advances through customer
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service, introduction of new products and switching over to online banking keeping pace
with the globalization process.
The 30 banks in the private sector posted a 24% in operating profits in 2009 over the
previous year. Bangladesh Bank has been playing an important role for bringing out
discipline and dynamism in the banking sector of the country. Due to stringent
supervision and control exercised by central bank, there had been a continuous progress
in reduction of percentage of classified loans in the banking sector with recovery of
default loans.
LIMITATIONS OF THE STUDY:
This study is mainly depended on the secondary data.
Limited primary data are also used.
A time constraint was another limitation in comparison of the vastness of
the topic.
Much information was possible to gather but we can’t gather with our
limited knowledge .But I have tried our level best to make this report
possible.
The research has some sampling errors as the time, budget and experience
in choosing the sample are deemed to be inadequate.
Time: Time is an important issue in report writing. As a specific deadline
has been given for submission so could not perform all the researches.
And we hardly found time to sit and do more libraries works and to
explore more new things, as I had to do a regular office job beside this
project.
Lack of experience: A comprehensive result of practice of marketing
study could not be found, as had some pivotal limitations like
inexperience. Sometimes it is necessary to evaluate the primary data
through investigations, which, if I could have done, certainly made our
report a better one.
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Chapter (v)
Recommendations
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Based on the findings of this research which have been above stated and implications emanating there from, the researcher therefore proffers the following matching recommendations put down hereunder for urgent policy action:
1. That efforts should be made by the monetary authorities to effectively manage the banks’ maximum lending. This policy thrust will most likely result into increased investment activities which will enhance capital formation in needed for its real sector investments and industrial growth.
2. Another policy recommendation with respect to the findings is that to optimally increase the level of capital formation in Nigeria, the monetary authorities have to maintain a sound banking sector. We cannot raise capital formation and national productivity level without maintaining a sound banking system.
3. The researcher also recommends that adequate efforts be made by banks to increase their level deposits as that will help in increasing the nation’s capital formation.
4. Banks should also be made to increase their investment portfolio within the country as that will equally help in increasing the nation’s capital formation and economic growth.
5. Again, the banking sector regulatory authorities have a duty to perform in ensuring good corporate governance and the best of banking practices are obtainable in the nation’s banking industry.
6. Finally, the further research should be carried out to investigate the non-conformity of the coefficient investment by commercial banks to the a-priori expectation of having a positive relationship with capital formation.
Conclusion
Private commercial banks of Bangladesh have dealt with some adverse political situations in the past, and they still face many problems which are out of their control. These problems mainly stem from the fact that Bangladesh is still going through the stages of development, and some of the sectors are still underdeveloped. Control of corruption and regulatory quality are two main aspects which need further improvement in Bangladesh. When compared to private banks of India, the ten randomly selected private commercial banks are performing well in terms of profitability. Their performance is reasonably well in terms of efficiency, but asset quality needs improvement, since the percentage of classified loans is comparatively higher. This again reflects the lack of control over corruption and weak regulatory control. Nevertheless, the strategies pursued by the banks to deal with the problems of the economic environment of a developing country like Bangladesh is commendable. In fact, these strategies have enabled them to make profits in adverse situations.
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Therefore, the study of the ten randomly selected banks reveals that operating a banking business in the economic environment of a developing economy like Bangladesh requires full understanding of the changing economic situations, sound strategy making for tackling adverse situations, and efficient risk management. Since the political situation of the country and the policy measures of the government change drastically from time to time, banks have to give more importance to short term planning than long term strategic planning. Theoretically, long term planning is important, but for economies like Bangladesh, planning for short term adjustments is more important, since the economic and political scenario changes every day. As a result, successful operation of commercial banks in a developing economy requires good strategic thinking, efficient management of risks, intensive monitoring of the movements of economic aggregates as well as capabilities to adjust to changing circumstances.
References:
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