Dhaka International University

Assignment
Course Name: Bank Management

SUBMITTED TO:
Tarana Tabasam
Teachers of DIU
Department of BBA
Dhaka International University

SUBMITTED BY:
Sakariye Mohamed Ahmed
Roll No: 28
Course No:CCB:332
Batch: 56th
Semester: 9th
Session: 2020
SUBMITTION DATE: 07/13/2020
1. Introduction:
Modern Islamic banking is relatively a recent development of the financial industry as
the first Islamic bank was opened in Egypt in 1963. Islamic banking activities have
grown rapidly after 1975 as a result of the oil price boom which brought a huge
amount of capital inflows to the GCC countries and therefore increased the demand
from Muslim investors for ways to invest without going against Shariah. In the 1970s
Islamic financial institutions focused on trade-related finance and leasing operations.
In the 1990s, a number of new Islamic investment funds have been launched to
manage wide-ranging portfolio of shares in companies whose activities are
compatible with Islamic principles and many commercial banks started Islamic
banking operations. The Banker (2000) reports that there are over 113 Islamic banks
and Islamic investment institutions managing over $147 bn of assets worldwide.
Islamic banks have good prospects and are expected to expand further as the Muslim
population is estimated at 1.2 bn worldwide and Islamic financial institutions have not
yet sufficiently benefited from their potential in assets creation. Islamic financial
markets are still underdeveloped and serious challenges facing them. Islamic banks
need to pay more attention to their asset and liability composition, acquire the
necessary expertise in financial engineering, and cooperate in establishing settlement
mechanisms and rating agencies. Principal among such problems that Islamic banks
should give greater attention to is to reorient their size and operations for higher
efficiency in order to face intense competition with conventional banks.
The issue of how efficiency in banking can be enhanced is important at the micro and
macroeconomic levels since efficiency has important policy implications. At bank
management level, financial institutions used to enjoy local oligopolies and therefore
make rewarding profits, but such advantages are shrinking due to growth in
competition. At the macroeconomic level, bank efficiency is a socially optimal target
since it reduces the average cost of financial transactions and therefore enhances the
society’s welfare. To our knowledge, efficiency in Islamic banking has not been the
focus of previous empirical studies. This is a result of lack of accessible micro data on
Islamic banks.1
2.Efficiency in the banking sector:
The study of banking efficiency is quite important for the following reasons: First; the
financial sector is a major player in modern economies, as a producer of financial
services and as an employer. The value-added of the financial sector as a share of
GDP has grown considerably over the last three decades. Banking system fulfil
essential functions in intermediating between savers and investors, financing private
sector trade and investment, and helping to ensure that the economy’s financialresources
are allocated effectively. The banking system must be sound and efficient in
order to effectively play its role. Furthermore, well-functioning banking system
increases the effectiveness of macroeconomic policy by providing a channel for
monetary policy signals.
Second; financial markets have become increasingly globalised. The growth of
international financial activities has been more rapid than the growth of domestic
markets and access to international capital markets for developing and transition
countries has grown rapidly. Technological progress, the development of new
financial instruments and liberalization have increased the potential for further growth
of the financial sector both domestically and internationally. A key challenge facing
the financial sector especially in developing countries is to respond to the recent wave
of globalisation and the move towards global financial markets. Domestic banks have
to work side by side with foreign banks. Less efficient banks with high operating costs
are likely to suffer from international competition.
Third; the measurement of financial efficiency is also important to all parties that
participate in the banking industry. Assessing bank’s performance through measuring
efficiency helps bank management to improve managerial performance. It assists
investor in making investment decisions whether to participate in financial activities.
Regulators are also interested in banking efficiency since the performance of the
banking sector has significant impact on other parts of the economy. The recent
experience of Western Europe shows that achieving a greater efficiency is one
motivation for the recent rapid changes in the structure of the banking industry
(Altunbas et al, 1996).
The efficiency of conventional banks especially in the US has been studied
extensively in the banking literature. Earlier studies mainly focused on the issues of
scale and scope efficiencies. Scale efficiency of a firm refers to the relationship
between the level of output and the average cost and it indicates how far is the level of
output from the optimal scale of production where the production cost would be
minimised. Scope efficiency refers to the relationship between average cost and the
production of joint products. Scope efficiency is measured to examine whether it is

optimal to produce all the products as opposed to specialising in one or more of them.
More recently, research on banking efficiency has focused on the issue of operational
efficiency (x-efficiency). The concept of x-efficiency was introduced by Leibenstein
(1966) who noted that organisations do not work as effectively as they could for a
various reasons. X-inefficiency refers to the deviations from the production efficient
frontier that represents the maximum attainable output for a given level of input, it
reflects the managerial ability to control costs and maximize revenues (Al-Jarhi, 2001;
Kwan and Eisenbeis, 1996). X-inefficiency includes both technical and allocative
inefficiencies of individual firms. Technical inefficiency reflects the loss of profits
from choosing a poor production plan while allocative inefficiency reflects the loss of
profits from failing to meet the production plan (Al-Jarhi, 2001).
In a survey article, Berger et al (1993) indicate that there is a virtual consensus that
xinefficiency are larger than scale and scope inefficiencies in the banking industry. The
survey shows that x-inefficiency account for approximately 20 percent or more of
banking costs while both scale and scope inefficiencies account for less than 5
percent.

The impact of Covid-19 in Banking Sector of Bangladesh

COVID-19 simultaneously affects human body and mind, society, world economy and even
breaks the concept of global village. All the achievements of medical science are failing to
stop the pandemic. Only in four months of its outbreak the entire world economy become
depressed. The giant USA, UK and countries of Europe are now in tensed to face the
multifarious affects of the virus. Like the rest of the world, Bangladesh is also experiencing
the bitter experience of the affect of Corona. In each day, number of affected people and
death is rising alarmingly. Overall businesses including capital market has been remaining
closed for last one month and it not certain when everything will restart. Like many other
sectors, banking sector of Bangladesh is also seriously affected by the affects of Corona
Virus.

Banking sector is the wheel of an economy. The health of the banking sector depends not
only on policy of the bank itself but also the growth of all other sectors of the country. Again
when the health of the banking sector deteriorates then growth of all other sector also
affected. So, Banking is closely interrelated with rest of the wings of the economy. Due to
the pandemic of Covid-19 and lockdown of the country, the different risks of the Banking
sector are being surged which very alarming for the economy.

The major Risk the Bank will face is Credit Risk. The Non-performing Loan (NPL) of the
Bank may rise in a new level due to this pandemic. Already most of the businesses have
suspended their business operation due to lockdown. Export oriented industries are losing
their confirmed orders as the foreign counter part's businesses also stopped. In this
situation, the credit worthiness of the existing borrower will be deteriorated which block the
possibility of repayment of loan. In March, Bangladesh Bank has already issued a circular
not to change the classification status of the borrower up to june-2020 as country is affected
by corona virus.

This is truly a good decision indeed. But, result of it, most of the borrower has already
stopped regular repayment as they are really badly affected by Corona. Bangladesh
government has declared different stimulus for survival of different industries, SMEs of the
country which is total Tk 50,000 crore and entire fund will be arranged from the Banking
sector of the country. If any borrower who has already loan liability, avail further loan under
these stimulus package then the borrower has to repay both the existing loan as well as
new loan under stimulus which will be quite hard for most of the borrower in an adverse
business environment.

So, debt burden of the borrower will increase. As already the Non-performing loan (NPL) of
the banking sector is a concern, if the borrower further fails to repay the fresh loan then the
situation will be worse. To avoid the situation Bank will try to choose only the good rated
clients whose track record and financial capacity are already good but this mentality will not
serve the purpose of stimulus package as the entire real affected businessman may not get
the opportunity.

Another risk which may increase is Liquidity Risk. The Banking sector of our country has
been suffering from crisis of liquidity in last one and half year. ADR/ IDR (Advance deposit
ratio/ Investment deposit ratio) of most of the Bank were in high over the prescribed rate of
central Bank. Bangladesh Bank had given time limit for the Banks to bring down the ADR
within the prescribed limits but most of them failed to comply. Still some Banks could not
bring down the ADR under the prescribe rate. Due to the effect of COVID-19 and result of
economic downturn the fund flow will be reduced.

Bank is going to face further liquidity crisis. On the other hand, as the government declared
stimulus will be arranged from Banks' own fund so Bank need additional fund to implement
this. Bangladesh Bank has already increase the cap of ADR/ IDR 2% more to increase the
lendable fund and to increase the liquidity of the Bank, Bangladesh Bank has already
reduced the CRR (Cash reserve requirement) from 5% to 3.5% in daily basis and 5.5% to
4% in bi-weekly basis and Repo rate lowered from 6% to 5.25% and declared that
Bangladesh Bank will purchase T-Bill from Banks.But, due to the economic depression
resulting from COVID-19, the income of the different organization has already reduced,
remittance flow is already in down trend, buying power as well as income of individual will
also suppose to be reduced which ultimately hit in the regular fund inflow of the Bank
seriously. To cover up the financial crisis, depositors will withdraw the deposits which is very
expected in such economic stagnant situation. Moreover, increase of NPL also negatively
affects the fund inflow of the Bank.

Big data
Big Data is a phrase used to mean a massive volume of both structured and
unstructured data that is so large it is difficult to process using
traditional database and software techniques. In most enterprise scenarios the volume of data
is too big or it moves too fast or it exceeds current processing capacity.

Intelligent Decisions
Big Data has the potential to help companies improve operations and make faster, more
intelligent decisions. The data is collected from a number of sources including emails,
mobile devices, applications, databases, servers and other means. This data, when
captured, formatted, manipulated, stored and then analyzed, can help a company to gain
useful insight to increase revenues, get or retain customers and improve operations.
a Volume or a Is Big Data Technology?
While the term may seem to reference the volume of data, that isn't always the case. The
term big data, especially when used by vendors, may refer to the technology  (which
includes the tools and processes), that an organization requires to handle the large amounts
of data and storage facilities. The term is believed to have originated with web
search companies who needed to query very large distributed aggregations of loosely-
structured data.

An Example
An example of big data might be petabytes (1,024 terabytes) or exabytes (1,024 petabytes) of
data consisting of billions to trillions of records of millions of people—all from different
sources (e.g. Web, sales, customer contact center, social media, mobile data and so on).
The data is typically loosely structured data that is often incomplete and inaccessible.

Business Datasets
When dealing with larger datasets, organizations face difficulties in being able to create,
manipulate, and manage big data. Big Data is particularly a problem in business
analytics because standard tools and procedures are not designed to search and analyze
massive datasets.
FinTech has strongly emerged in developed markets
FinTech, the emerging sector that uses technology to revamp financial services for both
businesses and consumers, can have prodigious impact on economic activities. FinTech
encompasses products and services within the categories of lending, personal finance,
retail and institutional investments, equity financing, consumer banking and many more.
[1] Today’s digital age demands easy access, convenience, efficiency and speed, which
have created a consequential and enormous market for FinTech industry.

The industry not only consists of startups but also established financial institutions trying to
implement FinTech solutions-banks also invest in, or even acquire FinTech to use their
technology internally or offer the service to their customers exclusively. For example, in
USA, in 2018, J.P Morgan acquired a payment startup, WePay [2]. Because they wanted to
provide their 4 million small business clients with WePay’s fast and rapid payment
technology, and the reason J.P Morgan is powering the payment method is because of
achieving growth in business, so that businesses can accept payments instantly, get paid
faster, and never lose a sale^2.

Eventually, the industry is enormously growing globally, and is expected to reach an

investment of USD 70 billion by 2020[3]. The FinTech industry is huge –it refers to
technological innovation in financial sector, including innovation in financial literacy and
education, retail banking, investment, and even crypto-currencies. Similarly, in Bangladesh
FinTech could have colossal impact in the financial sector, and in turn in the economy.

FinTech can be instrumental in driving greater

financial inclusion in Bangladesh
The adoption of FinTech in Bangladesh was a progressive move for stepping into the
emerging markets from a frontier market. In Bangladesh 35 million people were excluded
under the modern financial industry despite the existence of the industry for the last 400
years.[4] Thus, the emergence of FinTech was essential to address the large unbanked
population of Bangladesh.

One of the platforms of FinTech is Digital Financial Services (DFS), which opened up a new
dimension and helped individuals and businesses to have more control over personal
finances and, to make prompt decision and transactions. DFS consists of a broad range of
financial services that are accessed and delivered through digital channels; such as
payments, credit, savings, remittances and insurance. The DFS also includes mobile
financial services (MFS). One of the most important impact of FinTech in Bangladesh that
has not been intervened much yet is its ability to address poverty.

The four key elements of the Government’s “Digital Bangladesh Vision” are human resource
development, people involvement, civil services and finally use of technology in businesses.
[5] Since use of technology in businesses is of the key elements of making “Digital

Bangladesh Vision”, MFS has made the most significant improvement over the years.
However, still only 47% of the population are financially included [6].Meaning only 47% of the
population have access to useful and affordable financial products and services that meet
their needs – transactions, payments, savings, credit and insurance – delivered in
responsible and sustainable ways.

To bring the rest 53% of the population under the umbrella of financial services Micro
Finance Institutions (MFI) can play a vital role. Till now Bangladesh’s MFI cover some 32
million people, and give out credit of more than USD7.2 billion annually. This has created
scopes for people to become financially secure [7]. In Asia about 90% of the 180 million poor
household dearth institutional financial services because most formal financial institutions
deny the poor their services because of perceived high risks, the high costs involved in
small transactions, and the poor’s inability to provide marketable collateral for loans [8]. So,
MFIs is the main way through which these group can be financially included. In Bangladesh
MFIs has been instrumental for making greater financial inclusion but had face relative
stagnancy over the last couple of years due to emergence of agent banking services. In
order for them to increase the inflection point, and target more people in turn create greater
financial inclusion FinTech could play a great role.

Thus, to bring the financially excluded people under the umbrella of all the financial services
an integration of MFS and MFIs would be significant.