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CONDITION OF THE COMMERCIAL

BANK IN BANGLADESH
FINAL REPORT
COURSE: FIN433
SEC: 3
GROUP MEMBERS:
NAME ID

MD. SARWAR HOSSEN 1722311630

MD. SHAHRIAR HOSSAIN 1721548030

MD. NASIR UDDIN 1410840030

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1 Table of Contents
2 Introduction........................................................................... 3
3 History of Banking in Bangladesh ........................................ 3
4 Banking system & sector in Bangladesh .............................. 4
5 Banks condition .................................................................... 5
5.1 Challenges in banking industry ....................................... 6
5.2 Loans default & the reasons ........................................... 7
5.3 Impact.............................................................................. 8
6 The role of Bangladesh Bank ............................................... 8
7 Conclusion............................................................................ 9
8 Reference ........................................................................... 10
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2 Introduction
Bank is one of the most important character in any economy. Banking system and economy

are often closely related. A large sector of banks in any economy are commercial banks. In

Bangladesh commercial bank especially privately owned commercial bank did not start

immediately after the independence. Most of the institutions are nationalized at that time.

Howe ever over the time the number of commercial bank increase. Commercial banks of

Bangladesh have to deal with problem such as, corporate governance, lone default, risk

management etc. This problem are now turning out to be a national problem as banks are

facing liquid crisis.

3 History of Banking in Bangladesh

The first modern bank headquartered in Dhaka was Dacca Bank, established in 1846. It did

Avery limited business and did not issue banknotes. It was purchased by Bank of Bengal in

1862. The foundation of independent banking system in Bangladesh was laid through the

establishment of the Bangladesh Bank in 1972 by the Presidential Order No. 127 of 1972

(which took effect on 16th December, 1971). Through the Order, the eastern branch of the

former State Bank of Pakistan at Dhaka was renamed as the Bangladesh Bank as a full-

fledged office of the central bank of Bangladesh and the entire undertaking of the State Bank

of Pakistan in, and in relation to Bangladesh has been delivered to the Bank. After the

independence, banking industry in Bangladesh started its journey with 6 nationalized

commercialized banks, 2 State owned specialized banks and 3 Foreign Banks. In the

1980'sbanking industry achieved significant expansion with the entrance of private banks.

After the liberation of Bangladesh the twelve Banking companies who were doing business in

Bangladesh, were nationalized by the Government of the People’s Republic of Bangladesh

There were no domestic private commercial banks in Bangladesh until 1982; When the Arab-

Bangladesh Bank Ltd. commenced private commercial banking in the country. Five more
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commercial banks came up in 1983 and initiated a moderate growth in banking financial

institutions. Despite slow growth in number of individual banks, there had been a relatively

higher growth of branches of nationalized commercial banks (NCBs) during 1973-83. There

number had increased from 1512 in 1973-74 to 4603 in 1982-83.

4 Banking system & sector in Bangladesh

The financial system of Bangladesh consists of Bangladesh Bank (BB) as the central bank.

The financial system also includes insurance companies, stock exchanges and co-operative

banks. Bank Company Act, 1991, empowers Bangladesh Bank to issue licenses to carry out

banking business in Bangladesh. Licenses may be cancelled if the bank fails to comply with

provisions outlined by Bangladesh Bank or ceases to carry on banking business in

Bangladesh. The commercial banking system dominates the financial sector with limited role

of Non-Bank Financial Institutions and the capital market. Sonali Bank is the largest

nationalized commercial bank while Pubali Bank is the largest domestically owned private

commercial bank, with over 400 branches. Among the 12 foreign banks, Standard Chartered

Bank has become the largest in the country.

There are 59 scheduled banks in Bangladesh who operate under full control and supervision

of Bangladesh Bank which is empowered to do so through Bangladesh Bank Order, 1972 and

Bank Company Act, 1991. Scheduled Banks are classified into following types:

 State Owned Commercial Banks (SOCBs): There are 6 SOCBs which are fully or

majorly owned by the Government of Bangladesh.

 Specialized Banks (SDBs): 3 specialized banks are now operating which were

established for specific objectives like agricultural or industrial development. These

banks are also fully or majorly owned by the Government of Bangladesh.

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 Private Commercial Banks (PCBs): There are 41 private commercial banks which

are majorly owned by individuals/the private entities. PCBs can be categorized into

two groups:

 Conventional PCBs: 33 conventional PCBs are now operating in the industry. They

perform the banking functions in conventional fashion i.e. interest based operations.

 Islami Shariah based PCBs: There are 8 Islami Shariah based PCBs in Bangladesh

and they execute banking activities according to Islami Shariah based principles i.e.

Profit-Loss Sharing (PLS) mode.

 Foreign Commercial Banks (FCBs): 9 FCBs are operating in Bangladesh as the

branches of the banks which are incorporated in abroad.

(2019). Retrieved 23 December 2019, from https://www.bb.org.bd/fnansys/bankfi.php

5 Banks condition
Bangladesh's financial sector is dominated by the banking sector. The dominance of the

banking sector makes the financial sector vulnerable on the one hand, but highlights the

crucial importance of the sector in resource mobilization and economic growth, on the other.

Most banks have not been able to show significant improvements on indicators such as

capital to a risk-weighted asset, non-performing loans, expenditure-income ratio, and return

on asset, return on equity, liquid asset, and excess liquidity despite several measures taken by

the central bank. The central bank has also appointed observers in 14 banks and financial

institutions, both state-owned and private to check the further deterioration of these banks and

supervise closely to improve their governance. Profitability, measured by return on asset and

return on equity, has been negative for the state-owned banks. In case of non-performing

loans (NPL) similar performance is observed. For private commercial banks, though these

indicators are positive but very low. On the other hand, NPL in private commercial banks and

foreign commercial banks have increased.

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The problem of lower profitability of bank is that the banking industry in Bangladesh are lack

of effective and efficient corporate governance. Best practice of corporate governance can

speed up the operations, cut corruption, increase profitability and the performance of banks.

The performance of private banks and public banks (state-owned banks) in the country

justifies the views of this scribe. Imbibing best practice of corporate governance in the

banking industry is the crying need of the time. Competition in the banking industry is also

hitting from the capital market end, with the corporates increasingly going to the equity

market to raise funding. This not only hits the banks in the belly by affecting their core

business but also indirectly affects their contribution to the market cap which dropped from

59% in 2007 to less than 25% in June 2010. Highly inconsistent interest rates of deposits and

lending of banks in the country stand as a stumbling block to bank's investment. Of high-

interest rates on lending from the local banks, some off-shore banks have started lending in

the country at lower rates than the local banks. Experts opine that wrong policies of the

policy-makers of banks and the controlling authorities have made the banking industry week

and vulnerable in terms of profitability, operations, and growth.

5.1 Challenges in banking industry

The main challenge that the banking industry facing is the lack of corporate governance.

Which lead them to efficient performance. The reasons that they are facing this problem are:

1. Nepotism is the number one concern for the growing in efficient performance of the

banking sectors. Individuals are placed in positions of power largely because of their

family background rather than their capabilities.

2. Most of the directors are not educated or experienced enough to be in such position.

Which lead them to an efficient governance.

3. The “profit at any cost” mentality is problematic. It also humper the governance

policies.
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4. Poor audit reports hamper good corporate governance.

5. There is inconsistency in the regulatory system.

6. The ineffective role of independent directors (IDs) is another challenge.

7. There is a lack of activism on the part of shareholders.

8. Weak pressure groups are not doing their part.

9. The borrower-dominated market. Corporate clients are few in number compared to

the number of banks in Bangladesh, causing unhealthy competition for extending

loans.

10. There is no market for corporate control in Bangladesh.

5.2 Loans default & the reasons

Banks are losing their revenues because of increasing of default loans. As of June 2016,

defaults amounted to TK 63,365 crore, which is 10.06 percent of the total outstanding loans,

according to data from Bangladesh Bank. Non-performing loans (NPLs) surged to TK 93,911

crore last year from TK 50,156 crore four years ago, according to Bangladesh Bank data. The

default situation in the state banks is worse. At the end of the first quarter of 2016, the

nonperforming loans of state-owned commercial banks stood at 24.27 percent. In contrast, it

was 6.2 percent in neighboring India. Government just injecting money to pull the banks

from this situation. Eventually the situation is handled by the taxpayer money.

SALEHUDDIN AHMED, a former BB governor, said the problem was created because the

loans were given through anomalies and corrupt practices. Though the default is a big

concern for the banks, banks are still give away loans. This happened because of the political

influences. It became much worse after sanctioning the loan. When the lone became default

the bank could not take any action. Moreover, lengthy legal procedures involving disputed

loans make it very difficult for banks to recover value from NPLs or their collateral, further

exacerbating loan losses, the report said. This is becoming the huge problem for the liquidity
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crisis. Poor governance at bank boards, inadequate credit information, and inadequate

financial statements of borrowers are major factors contributing to poor asset quality,

according to an International Monetary Fund report on Bangladesh in January 2016.

5.3 Impact
The impact of this situation put bad impression among the investors. Many depositors are

withdrawing money from banks. This trend made the bankers concerned. Bangladesh Bank

governor FAZLE KABIR has acknowledged the panic, and sought the finance minister's

intervention in addressing the situation. The panic in the banking sector has started with the

scam in the Farmers Bank from where the depositors are not getting back their money. The

issue of TK 5.8 billion of the climate fund that was deposited with the Farmers' Bank came

up for discussion in parliament. As a sequel to that, several government organizations of gas,

electricity, and telecommunications sectors had withdrawn almost TK 5 billion from three

private banks and deposited it with the government banks, according to an investigation. A

central bank directive tightening the credit low has limited the bank's capacity to provide

fresh loans and they are focusing on collecting deposits at higher rates.

6 The role of Bangladesh Bank

The central bank should do something to handle this situation. According to them:

“The banking sector of Bangladesh experienced a moderate level of resilience in FY18.

Bangladesh Bank persistently continues its efforts to uplift and ensures a sound and stable

performance in the banking sector. In FY18, Bangladesh Bank (BB) adopted a number of

policy measures to emphasize risk management and corporate governance in the banks,

periodic review of stability of the individual bank as well as the whole banking system,

monitoring of large borrowers, fraud forgeries and strengthening internal control and

compliance through self-assessment of anti-fraud internal controls etc. Monitoring of

investment in shares by the scheduled banks has been made stringent in light of the
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amendment brought in the Bank Company Act, 1991 (amended up to 2018). Risk

Management Committee at the board level has been made mandatory, with regular

evaluation. A revised Risk Management Guideline has already been put into effect for banks

to improve resiliency. Besides, all core risks management guidelines have been revised

recently for timely identification, measurement, control, and monitoring of all existing and

probable risks of banks.”

7 Conclusion
In conclusion, we can say that the overall condition of the commercial bank in Bangladesh is

not good. The problems such as corporate governance, lone default is not in control

comparing to other countries. More inefficiency is seen in the state owned bank. Nepotism,

corruption, Poor audit reports making the situation more complicated. Political interference

makes the central bank helpless. Banks cannot take any action against the default loans. This

situation is going toward worse, which will surely put an impact on the economy in the near

future.
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8 Reference

1. (2019). Retrieved 23 December 2019, from

https://www.bb.org.bd/fnansys/bankfi.php

2. (2019). Retrieved 23 December 2019, from

https://www.thedailystar.net/supplements/25th-anniversary-special-part-5/banking-
sector-sustainable-growth-212689

3. Ahmad, R. (2019). For a healthy banking industry. Retrieved 23 December 2019,

from https://www.thedailystar.net/opinion/economics/healthy-banking-industry-
1583887

4. Rahman, R. (2019). Default loans soar. Retrieved 23 December 2019, from

https://www.thedailystar.net/frontpage/default-loans-soar-1275622

5. Alo, P. (2019). Panic, concern, confusion grip banking sector. Retrieved 23 December
2019, from https://en.prothomalo.com/bangladesh/news/171320/Panic-concern-
confusion-grip-banking-sector?fbclid=IwAR3aX-s76vJ000-KymCX-
gbLsl6hcMX3F9eNIzQxSQTXhG7ikVNPy0xda68

6. (2019). Retrieved 23 December 2019, from

https://www.bb.org.bd/pub/annual/anreport/ar1718/chap5.pdf