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Privatization of Nationalized Commercial Banks in Bangladesh
http://www.reportbd.com/articles/53/1/Privatization-of-Nationalized-Commercial-Banks-in-Bangladesh/Page1.html
Super Admin

 
By Super Admin
Published on 23 February 2007
 
Significance of this Research, History of Financial Sector Reform in Bangladesh, Structure of Bangladesh Financial Sector, Comparative Performance Evaluation of the Banking System, Privatization of Nationalized Commercial Banks (NCBs), Chartering New Banks to Foster privatization, Policy Implications.

Table of contents
Privatization of Nationalized Commercial Banks in Bangladesh
Course Code: BBA 3625
Course Title: Bangladesh Economy

Prepared for:
Md. Saifullah
Lecturer School of Business,
Asian University of Bangladesh

Table of contents
Section I Introduction
Section II Significance of this Research
Section III A short history of Financial Sector Reform in Bangladesh
Section IV The Current structure of Bangladesh Financial Sector
Section V Comparative performance Evaluation of the Banking System
Section VI Privatization of Nationalized Commercial Banks (NCBs)
Section VII Chartering New Banks to Foster privatization
Section VIII Conclusions and Policy Implications
Bibliography

Introduction - Privatization of nationalized commercial bank in bangladesh
The purpose of this research is to analyze the banking system in Bangladesh, and to suggest policies to encourage privatization of commercial banks in Bangladesh. This research specifically examines the financial statements (balance sheet and income statements) of both nationalized commercial banks (NCBs) and private banks, and statistically analyzes them to understand their relative performance over the past two decades. There are various lessons to be learned from this.

The development of financial markets will increase the efficiency of the flow of funds between savings and investment. Increased efficiency will take place through a variety of mechanisms: the cost of intermediation will decrease because of increased competition to attract users and providers of funds; the cost of raising funds will decrease as the inflation rate declines: and funds will increasingly be allocated to users with better investment projects. The establishment of a market driven private banking system is linked to achieving higher employment, increased productivity, more efficient use of resources and more rapid economic growth in Bangladesh.

Banks, in general, perform three basic functions valued by the overall economy. One of these functions is the centralization of credit evaluation and monitoring, which produces information that cannot be easily made public by the borrower. This centralization exploits cost economies and, together with a diversified loan portfolio, lowers the raise of credit. Second, banks offer transformation services that convert claims issued by borrowers into instruments that investors are willing to hold. These claims may be transformed with respect to their maturity, liquidity and credit risk. This special role of banks derives from the social welfare enhancements that can be realized when banks coordinate the funding of these illiquid assets with liquid liabilities.  Third, banks provide access to payments system and to a clearing house for transactions. Public policies to attain safe and sound banking have traditionally been focused on methods to assure the continuous and efficient functioning of their transactions and payments mechanism. However, whether these services are rendered optimally by nationalized or private banks inconsistent and open question, and this research will shed light on the relative merits of these two types of banking system for Bangladesh.

The health and efficiency of the financial sector are crucial to economics growth. It is the system by which a country’s most profitable and efficient projects are systematically and continuously funded, and thus it is the mechanism, which ensures that resources are directed to the most productive sources of future growth. The financial system not only transfers funds from savers to investors: it must be able to select projects which will yield the highest returns, accumulate sufficient quantities of capital to fund the range of investment projects across economic activities, account for price risks across assets, monitor performance, and enforce contracts.

This financial sector requires a highly skilled manpower and quality information to undertake this vast range of tasks. The most common role of government in successful financial systems has been to ensure that financial institutions serve these vital functions as efficiently as possible. That role has taken the form of regulation to monitor and enhance bank solvency and to limit financial sector instability. The efficiency of national investment depends on the complementary roles of both the private and public sectors.

The NCBs have expanded credit to priority sectors in response to government directives without due regard to quality, often at interest rates below the bank’s cost of funds. This had led to inefficient resource allocation and widespread bad loan. It has become increasingly difficult for the banking system to play its essential role of supporting the country’s economic development and adjustment goals. The esteem of these problems reduces the level of investment, the productivity of capital and the volume of savings. This results in reduced economic growth and employment opportunities.

Bangladesh’s continuous stagnation in investment and economic growth is related to the situation in its financial sector. The financial sector has the potential to contribute to economic and industrial growth by enhancing resource mobilization and improving resource allocation. By enhancing resource mobilization and improving resource allocation. At present, Bangladesh has a small undeveloped financial sector. It contributed 2.1 percent to GDP in 1998, declining to 1.8 percent by 1992; the sector is growing slower than GDP. In terms of the usual measure of financial deepening (M2/GDP0), however, there was a small gain, from 29 percent in FY89 to 33 percent in FY93. While the extent of bad debts in the nationalized commercial banks is now known with accuracy, they are believed to be substantial. If these bad loans are also bad investments, Bangladesh’s capital/output ratio will have been adversely affected, lowering the rate of economic growth. If the annual  impact of bad investments were compounded over the 23 years since independence, the overall effect on economic growth would be substantial. The main challenge for Bangladesh’s financial system for the near future is to improve the quality of inter mediation and resource allocation to contribute to a more rapid rate of economic growth and higher levels of saving and investment.

This paper is divided into eight sections. Following introduction in section I. Section II focuses on the significance of this research paper, a short history of the financial sector reform is provided in section III. Section IV discuses the current structure of the Bangladesh financial sector Section V presents data related to the comparative performance of nationalized and private-sector banks, and statistically analyze them.  Section VI discusses the privatization of nationalized banks, and lessons leaned from them. Section VII examines the merits of chartering new banks to foster privatization in Bangladesh. Conclusions and policy implications are given in section VIII.

Significance of this Research
Financial development is a prerequisite for economic development. Given the very low levels of both domestic and national savings, and together with rapid population growth, Bangladesh has the need to mobilize its financial resources more effectively to make resources available for investment.

The Manikin-Shaw model (1973) of financial development states that development of a country’s financial structure is a precondition for economic growth, but the two authors provide alternative theories of the transmission mechanism by which financial conditions affects savings and investment. According to professor McKinnon (1973) economic units must accumulate money prior to investment. McKinnon’s hypothesis emphasizes the importance of money broadly defined as the primary vehicle through which saving (investment) occurs. Complementarily hypothesis implies that domestic savings share a positive relationship with the demand for real broad money. According to Shaw (1973), economic units must not necessarily accumulate money prior to investment. The financial deepening hypothesis asserts that saving and investment may occur through the accumulation of non-money assets.  This hypothesis implies a negative relationship between domestic savings and demand for real broad money, suggesting a substitution from money to other non-money financial assets as the primacy repository of domestic savings.
    
The importance of financial institutions for rapid growth is undisputed. A comprehensive study by King and Ross (1992) from across 119 developed and developing countries over the1960-1989 period provides compelling evidence that economic growth is dramatically dependent on financial sector size, private sector banks, credit to private enterprises and interest rates. The larger the financial sector in the context of the overall economy, the greater the share of lending by depository rather than central banks, and the greater the share of credit to the private rather than public sector, the greater is the rate of economic growth. These factors increase growth by rising to the amount and efficiency of investment.

We also investigate the relationship between the volume of demand deposits and economic output in developing economies. Many authors have accepted the theory that financial development is a prerequisite for economic growth in underdeveloped and developing nations, and have emphasized the important role assumed by the commercial banking system as and intermediary between savers and investors. Although much empirical analysis has been presented which supports the financial development theory, most has been indirect in nature. We employed data obtained from the International Financial Statistics Yearbook (1992) to produce significant evidence supporting the hypothesis that growth in the commercial banking sector significance explains growth in economic outpour.

We observed examine the determinants of income velocity of money in Bangladesh, and find that determinants of income velocity of money in Bangladesh, and find that proxy for financial development(demand deposits over time deposits) affects velocity negatively, implying that the development of financial institutions in Bangladesh remains at a primitive stage. More recently, we got evidence for McKinnon’s complementary hypothesis for Bangladesh, suggesting that Bangladesh’s financial system has not yet achieved a level of development whereby alternative non-monetary assets have replaced money as the primary repository for domestic savings. Private sector banks are more efficient than NCBs in Bangladesh on a risk-return criterion over 1984-85 period. One important policy implication from these studies is that the efficiency of existing commercial banks in Bangladesh should be improved so that these banks can accelerate the pace of economic development by focusing the domestic savings and guiding these savings to productive ventures.

This research contributes to our understanding of the relative merit of private banking vis-a-vis NCBs and its role in the development of Bangladesh in the following ways. First, private sector banks are viable alternatives to inefficient NCBs. At present, potential investors are fully aware of the overvaluation of NCB loan portfolio and hence overstated net worth, and have little interest in purchasing shares. For privatization to occur, the NCBs need to be restructured so as to attain a reasonable ability to function as business-like operations. The sale of equity shares in the NCBs to the public through the capital market will yield positive benefits both for the government and for the equities market itself, The government will gain revenue from the sales(and  the BB will no longer have to use its limited resources to subsidize NCB operating costs). The offering of NCB equity shares will increase the volume and variety of shares available for trading thereby broadening the securities market.

Second, funds are mobilized primarily through the banking system in the formal financial sector. There is no secondary market for government securities, no market for corporate debt and the equity market is small. Hence there is a preponderance of debt financing relative o equity financing. The banking system cannot provide large-scale long-term funds. Most deposits in the banks are short term, banks are limited in their ability to provide long-lending because of the large risk factors associates with short-term borrowing and long-tem lending. Furthermore, banks have a tendency to make loans based on collateral and/or personal relationships, not on projected cash flows. As a resell, most companies are highly leveraged and small and medium scale enterprises are virtually unable to obtain financing. Equity markets are in a rudimentary state and have yet to fulfill their potential to foster efficiency in the mobilization and allocation of long-term finance. Increases in log-term interest rates will provide increased incentive for the capital market to play an expanded role in financial investment to augment commercial bank lending.

Third, a risk adverse investor wold expects a positive relationship between risk and return from a financial investment in a capital market. Varley (1992) finds that this positive risk-return relationship does not exist for Bangladesh. The low-risk, low maturity National Savings Certificates offer a yield (16.6% APR) which is higher than the yield offered on high risk equity investment (16.0%), and this difference is larger on an after-tax basis because NSC yields enjoy tax subsidies while equity returns do not. Given a negative relationship between risk and return, it is paradoxical to observe that most businesses in Bangladesh have higher leverage ratios. This paradox exists because of regulatory laxity on the punishment of loan defaulters. It is expected that with a proper enforcement of a loan recovery act, the inverted risk-return relationship will become direct, and will encourage businesses to float their shares in the capital market.

Fourth, reform of the financial system and of the NCBs is a crucial aspect in the development of the Bangladesh equity capital market. system reform will increase the supply of loanable funds and , as the securities of privatized NCBs become available for trading, increase the  scope of equity financing as well. Privatization of NCBs will help alleviate the current problem of  a lack of securities which , in turn, will foster further financial market development. Deregulation will also help convince the private sector of the government’s commitment to developing financial markets and increase investors’ confidence in the equity markets. Over time, it is expected that private business will be able to finance expansion by publicly selling debt and equity securities. However, Development of the equity market is dependent on financial market reform and expansion of private banking. Fifth, the establishment of flexible interest rates will give both the private banks and the NCBs greater scope to  improve and expand their operations. The ability to adjust interest to take into account such aspects of the banking industry as cost of funds, credit risks, and local competitive pressures will provide both opportunity and risk to the institutions involved. it is anticipated that private banking will expand as a result of private bankers’ sharper competitive instincts and superior experience. This competitive opportunity should make the issuing of additional private bank charters more attractive, thus increasing the financial and political strength of the private banking sector, The likely expansion of private banking should not be mistaken, however, for a guarantee of security and continued existence of all banks, private or nationalized. In a competitive environment where auks are required to meet financial soundness requirements such as capital adequacy, some banks, private of NCB, may fail and go out of business. Just as refits are the reward for efficiency, so is the failure the penalty for inefficiency. Reward and penalties are inseparable from a well-functioning competitive market environment.

Sixth, without a substantial improvement in the NCB’s operations and financial soundness it would be difficult to sell tem to private investors. Improved supervision is also necessary to lessen the risk of bank failure or losses to depositors. Privatization of the banking system and its consequent increase in the number and soundness of loans made to private entrepreneurs will increase the relative size of the private economy per se. In particular, it will increase the size of that portion of the private economy, comparing publicly traded companies, that is accessible to prospective individual investors, not simply members of families or closed groups.

Seventh, a rivet banking system is also essential to the development of private enterprise firms as fully independent entities, since government-owned commercial banks are generally able to and frequently do, exert excessive control over enterprises to which they lend.

Significance of this Research - 2
Until the early 1980s, the Government owned, controlled and directed Bangladesh’s financial system with the objective of allocating funds to priority sectors. Loan recovery was not emphasized because loans were collateralized and considered ultimately collectable. The quality of financial intermediation, judged by loan recovery rates, was dismal. Bangladesh had virtually no private banking and role the private sector was considered secondary. In the early 1980s, the Government began to reform the financial sector. Interest rates on deposits were raised to provide a positive real return on deposits, private banks were allowed to enter, two NCBs were denationalized and another nationalized bank was converted into a limited liability company and partially privatized.

Recognizing the need to reform the financial sector, the Bangladesh Government appointed a National Commission on Money, Banking and Credit to undertake a major study of the financial sector in late 1984.The commission made its recommendations for financial sector reform in 1986 The problem of loan delinquency delinquencies was recognized as a key issue that needed to be addressed. Restoring the financial strength of banking institutions and introducing more flexibility into the financial system were identified as important strategies to revive the banking sector’s crucial role in financial intermediation, and ensure its stability.

In 1990, the Bangladesh Government started with a five-year financial sector reform project with the fooling ten agenda:

a. Introduce a more liberal interest rate policy; b. Introduce and implement an improved loan classification system; c. Introduce capital adequacy requirements and enforce these on the banking system; d. Develop improved supervision systems for the banks and use such systems to manage short-falls in capital adequacy and to identify problem areas within the banking system; e. Develop money market instruments and initiate the auctioning of a short term money market instrument: f. Improve the operation of the capital markets and take the regulatory steps needed to improve such markets: g. Clean up the jute debt in the commercial banking system and eliminate any risk to the commercial bank portfolio: h. Reform the NCBs in a three step process: 1. Recapitalize the NCBs: 2. Improve their operating systems: 3. Develop strategic approaches to their future development; i. Improve loan recovery through introduction of better legislation and course to collect delinquent loans, improve the bankruptcy law to ease the problems of liquidating companies, improve the flow of credit information for new loans, and require NCBs to improve their debt collection; J. Initiate an immediate program of improvement in manpower through upgraded training for bankers.

Policy changes under this program have introduced flexibility in interest rates on deposits and loans and improved prudential regulations and supervision of banks. The impact on the quality of intermediation is, however, not known it and a private industrialist still can not obtain financing for a large project without having to approach a Government-owned commercial or development bank.

It is apparent from the above agenda that the NCBs improve their efficiency and profitability to restore viability, through the improvement of their management, organization, credit extension Banks need to establish a system whereby the performance of managers is monitored and evaluated against targets, and rewards and penalties given accordingly to motivate staffs. Credit criteria for lending should be strengthened with more emphasis placed on a borrower’s creditworthiness than on his collateral.

Monitoring and collection of loans needs to be streamlined. Uniform accounting standards for branches and reconciliation of interbranch accounts are necessary. Effective internal auditing should be introduced. This research intends to address these issues so as to suggest future course of action needed to resolve the existing banking crisis in Bangladesh.


The Current Structure of Bangladesh Financial Sector
This section provides an overview of the current structure of the banking system in Bangladesh. The formal financial sector in Bangladesh includes: (a) Bangladesh Bank as the central bank: (b) 22 commercial banks, including four nationalized commercial banks, two denationalized private banks, ten domestic private banks and six foreign private banks: (c) four Government-owned specialized banks, two of  which have targeted the agricultural sector and the and two others serve industry: (d) one Government-owned investment company: (e) four non-bank financial institutions:(f) two leasing companies:(g) two large Government-owned insurance companies :(g) two large government-owned insurance companies (life and general) and several private insurance companies, including one foreign owned: and (h) the Dhaka Stock Exchange(DSE). Table 1 provides an overview of the institutions in the Bangladesh Financial Sector.

The roots of Bangladesh Bank (BB) date back to reserve Bank of India out of which the State Bank of Pakistan was created in 1948. Bangladesh Bank took over central banking functions from the State Bank of Pakistan at the end of 1971. The Bangladesh Banking Order of 1972 specifies BB’s central banking responsibilities and gives it substantial powers to formulate and implement monetary and supervisory polices and to advise the Government on economic policy. The Banking Companies Act (1991) and Financial Institutions Act(1993) specify a wide range of prudential requirements and extend BB’s powers to issuing directions to banks and financial institutions.

The financial health of Bangladesh Bank is good without any open or hidden losses. Its lending to the Government is moderate. BB operates the country’s payments system reasonably well even with a poor transport and communication infrastructure. However, Bangladesh Bank supervision is rather weak because of an inadequate number of bank auditors. There is a strong need to continue to strengthen BB as it would otherwise not be capable of supervising an expanding an increasingly liberalized financial system.

Table 2 presents the volume of deposits and advances in the banking system over the 1981-92 period. Deposits are Taka 2,600 core and advance Taka 2,250 core at the end of 1992. During the period of the financial sector reforms deposits have grown at rates of 10-15 percent per annum while advances rose first and then dropped sharply in 1992. The drop was probably caused by loan provisioning and agricultural credit write-off rather than a decline in the volume of advances. Table 3 provides the ratio of broad money to GDP. This ratio is a measure of financial deepening. The higher the ratio, the greater the level of financial deepening in the economy. This table indicates that there has been no significant increase in the financial deepening of the economy in the three year period before the reform. The ration was stable at 27percent for the three years and then resumed its growth to 29 percent.

Commercial banks dominate the financial system of Bangladesh. Table 4 presents a deposits and advances by type of a bank over the 1986-1993 period. Four nationalized commercial banks dominate the banking system with 63 percent of bank deposits and 53 percent of advances in 1993.in deposits from 69 percent to 63 percent and in advances from 56 percent to 53 percent, percent. They continue, however, to exert oligopolistic market power over the banking system. NCBs have helped to further the Government’s socioeconomic objectives by expanding their rural branch network and lending to agriculture, lending to small scale and cottage industries and funding state-owned enterprises.

Domestic private banks, which include two denationalized banks, increased their market shares between 1986 and 1993, in deposits from 20 percent to 27 percent and in advances from 14percent to 25 percent. These banks expanded their network by 33 branches, comprising 85 percent of the 39 new branches created during fiscal year 19920 The domestic private bank’s growth is more impressive, if data for the two denationalized banks are excluded. The denationalized banks share many of the same problems as NCB Domestic private banks offer higher interest rates to attract deposits and charge higher rates on loans. Their service is considered better than NCBs and they have expanded into fee-based and international services. These banks compete for a limited number of creditworthy borrows, but not with NCBs for priority or public sector lending.

As BB’s supervision improves, owever, problems in the private bans are also emerging, including insider lending. They also face problems of capital adequacy. Foreign banks lost market share in deposits from 6 percent in 1986 to 5 percent in 1993, partly because of the failure of Bank of Credit, Commerce International (BCCI), partly because the offer lower deposit rates, These banks cater to multinationals, international transactions and high net-worth individuals. Table 5 presents a breakdown of public and private sector loans. The Government and the public sector accounted for 23 percent, and  the private sector 77 percent of deposits in FY91, about the same distribution as in the previous year. The Government and public sector increased their share of bank credit from 31 percent in FY91 to 39 percent in FY93, reducing the rivet sector’s share commensurately. If the Government bonds issued to NCBs for recapitalization are excluded, over the medium term the share of public credit has remained more or less unchanged.

Table 6 gives the number of branches for the different types of banks. This table indicates that there are a number of large branch banks followed by the foreign and private banks, which have much more3, limited branch networks.

The NCBs have branched networks average 900 branches: an extremely large number. The networks have emerged from years of management concentration on deposit mobilization and providing banking services to rural areas. The NCB’s drive to expand their deposits arises from the continual need to provide fresh funds in an environment of poor loan recovery. As deposits are clearly associated with branch numbers, while advances are industry and location specific, the need to expand deposits leads directly to expanding branch networks. Urban branches are better sources of deposits than rural branches so the primary objective is to increase urban banshees. However, central bank policy required that the rural branch network be expanded at the same time, to provide banking services in such areas. Taken together these two factors led the NCBs to increase their branch network rapidly.

The two denationalized banks have much smaller branch networks than the NCBs: Their rural networks have been cut back since denationalization. Of the specialized banks two have large network and one a very small network. The two agricultural credit banks have more than 1,000 branches. Domestic private banks average 50 branches and foreign banks only 4.

Table 7 provides a breakdown of rural d urban branches of all banks. This structure of the banking system is very clear. The Government banks have very large urban branch networks (300/bank): the private banks, excluding the denationalized have much smaller  networks (41/bank) and the denationalized banks are in between with 130/bank. Apart from the very large rural networks of the NCBs, their urban networks are 7-8 times larger than that of the other banks.

A large branch network is important for collection of deposits and to provide the public with general banking services. Companies and  people want to maintain deposits at a convenient branch so the number and location of branches are an essential element of any strategy  to mobilize deposits. The massive branch networks reflect the explicit NCB strategy of deposit mobilization. The growth of the branch network has been an important element in the growth of deposits over the past 15 years.

The large branch network is very difficult to monitor and control. NCBs have shown to date, limited capacity to control their branch operations. The poor control of the branches is reflected in the high costs to the banks of the inter branch reconciliation balances and the high levels of bad debt. The NCBs have not effectively decentralized control of the branches so that the span of control required of the Head Office far exceeds anything that effective management can handle.

All nationalized and denationalized banks in Bangladesh are undercapitalized even under the current standard, which is somewhat lower than the minimum recommended by the 1992 Basle Committee. The Government recapitalized the NCBs to the tune of Taka 17.3 billion in 1992 and Taka 14.6 billion in November 1993. The recent capitalization has been necessary because of the laxity in recognizing losses and continued bad lending. In addition, previous recapitalization did not cover bad jute loans. While estimates of bad debts are not definitive because of weak prudential standards, they are likely to be substantial.

The high default rate among NCB borrowers has occurred because of poor management, lack of little incentive to make good loans and Government direction and intervention. NCBs were required to make high-risk loans to priority sectors, new entrepreneurs, public corporations, sick industries and borrowers with political influence. In addition, these NCBs were obliged to endure loan forgiveness programs by the Government. Their own lending practices were not based on sound lending principles. For example, these NCBs have used imprudently high equity ratios as  basis for lending. They have also been lulled into a false sense of security because their lending has been collateralized and bad loans were masked by inadequate accounting  practices.

It is nearly impossible to foreclose on collateral and liquidate it. The recent legal reforms undertaken as part of the financial sector reforms have enabled the banks to obtain decrees in their favor from the Financial Loan Courts in their cases against defaulters. However, very little collateral has actually bee liquidated because of weak legal enforcement mechanisms. These problems will have to be strengthened by substantial improvements in enforcement.

The two denationalized private commercial banks inherited substantial bad loans from the nationalized period. At the time of denationalization, the quality of their loan portfolio was not fully disclosed to there former owes. Equipped with a bad loan portfolio and poor lending practices, these banks have conducted their business as if they were still CBS. Not surprisingly, they have not come up to normal commercial banking standards under the new and tighter banking control and supervision. Their net worth is likely to be seriously eroded, especially since they have not had the recapitalization support provided to NCBs.

Comparative Performance Evaluation of the Banking System
This research examines the relative performance of  private commercial banks vis-a-vis nationalized commercial banks over the 1984-1993 period by statistically analyzing several accounting ratios that reflect risk-return characteristic of these institutions. This study will discuss two key dimensions on bank performance: profitability and exposure to risk. Profitability is clearly more the important, because satisfactory profits preserve the bank’s capital, providing it with a base for future survival and growth. Due to the lack of well-functioning stock market, stock prices of private banks provide no reliable guide for bank performance. Therefore this research focuses on various profitability and efficiency ratios of the banking sector in Bangladesh. By examining these ratios, the strength and weakness of private versus public banks can be ascertained, and appropriate remedial action can be undertaken (Sinkey, 1992).

More specifically, this research examines the NCBs, private sector banks and Islamic bank by employing five efficiency criteria: productive efficiency measures how efficiently a bank is utilizing its resources to produce a given level of output. Operational efficiency measures how well a bank is managing its cost structure. Distributive efficiency refers to how equitably a bank is collecting deposits and disseminating credit to various account size classes.

The primary source of data utilized in this research is Scheduled Bank  Monthly Bulletin published by Bangladesh Bank, and Statistical Yearbook of Bangladesh by the Government of Bangladesh and annual Reports of Concerned Banks. Individual interviews and discussion with top management of private banks and NCBs and senior staff at Bangladesh Bank and Ministry of Finance provide a secondary source of information when the necessary information cannot be obtained in the published documents.

Analysis of Empirical Results
The domestic and foreign private banks performed better than the NCBs and the denationalized banks on operational efficiency criteria. Table 8 and the denationalized banks on operational efficiency criteria. Table 8 shows that the large private sector banks are more private banks are almost twice as that of at NCBs. The private banks also mobilize almost three times more deposits and loans per branch than do the NCBs. A commercial bank’s cost structure shows the most important determinant of its intermediation margins, and significant difference in margins indicate differences in efficiency.

Table 9 shows the gross intermediation margin (which includes the interest margin and fee income) of NCBs and private banks. Margins at NCBs have been consistently lower than at private banks, and furthermore, have been declining since 1989. These differences are due to their uncommercial approach to pricing loans, exacerbated by direct credit to jute and other sectors, their higher share of non-earning assets and their lower fee income. Private banks are charging higher lending rates and more fee income, so that they can afford to pay slightly higher interest rates and still earn higher gross profit margins. However, these data do not reveal the emerging problems with the quality of loans in domestic private banks, which is likely to increase as banking supervision and capital control intensifies.

Table 10 presents various productive efficiency ratios of public, private and Islami Bank. Three specific proxies are used to measure productive efficiency of commercial banks: fund utilization ratio, per employee fund utilization ratio and profit-employed fund ratio. The fund utilization ratio is defined as the ratio of fund employed over loanable  fund. This ratio shows the ability of a bank to convert its loanable fund into income earning assets such as loans and advances . These ratios indicate that Btu private and Islami banks are more efficient than the NCBs in terms of these ratios. Table 11 provides various  profitability ratios of selected public, private and Islami banks. Four Measures of profitability such as incme-xpense ratio, profit-expense ratio, profit-loanable fund ratio and profit-employed fund ratio indicate very strongly that the private sector banks have been more profitable than NCBs over the 1984-1992 period. The average profitability ratio over this time period also supports this conclusion. It is also important to note that the profitability ratios have been declining over this time-period for all three types of banks. The profit-employed fund ratio of the NCBs has declined from 2percent in 1984 to. 1 percent in 1992, while the same ratio for the private banks has declined from 5.3 percent in 1985 to 2 percent in 1992.

Table 12 provides the operational efficiency ratios of selected public, private and Islami bank. Islami bank has the highest per employee administration cost, with private banks in the second and the public banks in the third position. However, the administrative cost per taka employed is the third position. However, the administrative cost per taka employed is the lowest for Islami bank, and this ratio is the same for public and private sector banks. Table 13 presents a composite productivity index for each type of bank. We constructed this ratio because private banks have the highest profit and operating cost, and this ratio provides us a common yardstick to comer relative performance of these banks. cording to this trio, the private sector banks are the most profitable, with the Islami bank in the second, and the public sector banks in the third position. The average value of this composite productivity index over the 1984-1992period was 0.66 for private banks, 0.57 for Islami banks and 0.23 for the public sector banks.

Table 14 shows a bank inequality index that explains the distribution of deposits and advances within the various types of banks in the banking sector. bank Inequality indexes is calculated as a ratio of cumulative percentage of total deposits over cumulative percentage of total advances in a given account size class. This index ranges from 0to 1 with a higher value indicating a more equitable distribution between deposits and loans. To public sector banks are found to be more equitable than its private sector counterparts in collecting deposits and disseminating loans and advances. The NCBs did not collect deposits from small savers and disburse them to rich borrows disproportionately like their private sector counterparts.

Table 15 shows the allocation of employable funds to various sectors by the three types of banks. Private sector banks and Islami banks are behind in lending to agriculture and manufacturing sector. Not only these banks lend less to these two sectors, but also their lending to these sectors have been declining over the years. Private sector banks are motivated towards short-term profit, and this is evident in their huge involvement in trade financing. The real of the Islami Bank is not according to the norm.  Islami Bank is far behind of public sector banks in long-term lending. The term financing of Islami Bank has come down from 29.7 in 1984 to 14.72 in 1992. Islami Bank also lags behind in terms of distribution equality of bank deposits and advances. The performance of the private sector banks is banks is generally better than NCBs in productive, profitability and operational efficiency criteria, but worse than NCBs in allocate and distributive criteria.

Privatization of Nationalized Commercial Banks (NCBs)
The expected improvement of the Nationalized Commercial Banks (NCBs) has not been forthcoming and the banks continue to experience rising levels of bad debt and operating losses. The jute exposure of these banks is not resolved yet. The critical question is whether the time is ripe for privatization of these banks. In spite of reforms implemented since 1989, and significant progress made in financial policy, Bangladesh'’ financial sector remains underdeveloped and continued reforms are needed along a broad front.  Then main issue is that the quality of financial intermediation remains poor. lending to priority sectors had inflicted enormous cost to the economy’s growth. Thus, improving the quality of intermediation dominates other important concerns such as resource mobilization and money and capital market development. Under present circumstances,  additional resources at the disposal of NCBs would only result in more bad loans. Money and capital market development is cotangent on the participation of healthy finical institutions and reputable firms in need of financing for expansion. A sound, efficient banking system, the main financier of industry, agriculture and trade, is essential for economic growth. Banker’s role in independently screening and monitoring investments and sharing risk is crucial for the development of entrepreneurs and the economy.

Countries in other South Asian countries have implemented  reforms gradually for many years to improve the performance  of its  banks, but they are still inefficient and provide poor service and are saddled with bad debts and inadequate capital. International experience suggests that developing a competitive, efficient banking system under government ownership is difficult at best. Thus, Bangladesh should privatize Nationalized Commercial Banks (NCBs), allow new banks and financial institutions entry and permit the orderly exit of failed banks and financial institutions to develop a competitive, efficient private financial sector which can contribute fully to industrial and economic growth. Commercialization of the NCBs, while desirable, will not substitute for their ultimate privatization.

The government as a candidate for privatization has identified Replay Bank, the partially privatized Nationalized Commercial Banks (NCB). The privatization strategy should minimize restructuring prior to privatization and fully disclose Rappel’s condition to enable buyers to make informed bids. Restructuring prior to privatization could include a financial package to restore solvency and some downsizing of staff and branches that could be done quickly, leaving the main effort to the buyer’s judgment and strategy. It may be advisable to amend the regulations restricting bank ownership by a group of 5 percent to interest buyers who can also manage the bank. Successful privatization will also require imposing a hard budget constraint on the state-owned enterprises, the main debtors of these banks-the major restructuring effort in the jute sector will assist in this regard. The privatization process should be transparent and utilize an auction to gain polemical support.

To reverse the public’s poor perception of bank privatization, previous unsuccessful attempts should be rectified as a priority. The denationalized banks, Uttra Bank and Pubali Bank have performed as badly as the Nationalized Commercial Banks (NCBs). Uttara bank and Pubali bank need to be restructured urgently by the Government with BBs intervention and assistance. Restructuring could include a financial package to restore solvency, management and staff reorganization and branch closure. Where necessary, the problems in domestic private banks also need  to be dealt with. The government should then build on the decisive, and hopefully successful, privatization of Reappear and interventions in Uttara, Pubali and other private banks, to privatize the remaining three NCBs.

Opposition to privatizing the remaining Nationalized Commercial Banks (NCBs) may arise from bank employees, bureaucrats, loan defaulters and the general public. The employees may not want this because they fear of losing jobs. The employees may not want this because they fear of losing jobs. Bureaucrats may oppose such move purely on ideological ground and belief that selling price is not fair. Loan defaulters may oppose it because they believe that private owners will be more stringent in collecting overdue loans. The general public may oppose it on the ground that the selling price is too low and selling a bank to a group of individuals is the result of nepotism.

A successful privatization may require the following steps. First, the branch network must be reviewed and the losing branches must be closed. For the most NCBs, this will lead to a substantial reduction of rural branches. Tier rural branches may be coordinated with BKB and RAKUB, the specialized agricultural and rural credit banks. Second, the labor force must be trimmed to a size consistent with the profitable operation of the bank, and the pension facility of retained staff must be funded. Golden shake program to discharge employees must also be funded. Third, the future tax liability of the banks must be assessed prior to privatization, and the government should be ready to pay any overpaid taxes as they are likely to receive any underpayment. Fourth, the management responsibility must be clearly defined. It may be desirable to relax the restriction of 5 percent ownership in order to find prospective manager owner . Finally, the loan portfolios of the NCBs must be cleaned up.

The privatization of two nationalized commercial banks (NCBs) in the early 1981s offers some interesting lessons in the pitfalls of implementing a policy of privatization. While the privatization of one bank(Rupali) was stalled after partial sale, the Government divested two other banks, Pubali and Uttara. The decision to divest these banks was related to the fact that their previous owners were Bangladeshi, and thus no legal entanglements were expected. The process of divestiture was, therefore, limited to negotiating only with the previous owners. However, to make it politically acceptable, a portion of the shares was reserved for the employees and a small part for the Government. The sale prices of Pubali and Uttara were fixed by Government on its “valuation” of net worth. The Government skipped the essential task of properly evaluating asset values and restructuring finances where necessary. Even the asset valuation was reportedly unavailable to the prospective owners.

Almost a decade after privatization, the competitive position and operational efficiency of the two banks has hardly changed, no major management changes have occurred, redundant staff has not been released, and the banks are suffering huge operating losses. In spite of the fact that both banks did not provide for classified loans, their combined loss in 1991 alone amounted to about Taka 243milion.A large part of the ongoing problems of he privatized banks can be traded to the history of mismanagement during the erred of public sector management. Substantial advance-transferred during privatization as asset-have  not turned out to be non-performing; overrunning continues under threat of militant unionism; and unprofitable branches cannot be closed as they serve the Government’s social program. While one bank is owed almost Taka 240 core by Government-owned corporations(mainly textile mills) and on account of the recent  Government agricultural loan forgiveness scheme, the other carries almost Taka 200 core on account of the directed jute credits.

The Government has not taken an evenhanded approach between NCBs and these private banks in meeting its debt obligations. In one case, whereas it compensated all the NCBs for its debt obligations. In one case, whereas it compensated all the NCBs for its guaranteed debt for a  closed out Government consumer corporation, it refused to pay the privatized bank, which had to ultimately seek a decree from the High Court. Another important aspect, which has seriously undermined commercialization of these banks, is the continuing lack of autonomy on staffing issues. The privatization terms not only bound the purchasers to abide by the service and employment rules agreed to by the Government in 1982, the banks were also required to follow strictly the frequent pay raises and annual bonuses awarded to public enterprises. In short, the basic ingredients for successful privatization-a healthy cash flow and managerial autonomy-were missing, thereby eliminating the possibility of any genuine commercialization.

The following three major lessons can be learnt from the early experience with bank privatization in Bangladesh. First, while change in ownership is a necessary condition, it is not a sufficient condition for successful privatization. There is a need to successfully develop privatization strategy, which includes a thorough ex-ante analysis of financial and managerial aspects of the enterprises targeted for privatization. This must be done within an environment of strong  banking supervision. Second, the failure to reap clear economic efficiency gains results in deepening public skepticism about the privatization process, and provides Government with a disincentive for  further divestiture programs. Third, the choice of the sale strategy-public offering, wide ownership, as opposed to a closed deal-is also an important determinate of the ultimate success of the enterprise. In the case of the two banks, the mere transfer of shares to the previous owners did not precipitate major efficiency changes. The doubts surrounding the value of assets and the task of fixing responsibility for past debt has preoccupied the attention of the owners, to the detriment of introducing such changes.

Chartering New Banks to Foster Privatization
While the importance of a private banking system is paramount, the relevant question is what is the best way to develop one. The competitive approach of starting more private banks and supervising these closely to insure that there is compliance with the various regulations governing the banking system seems to be the best way to  expand the private banks. There are three important points that relate to the development of private banking. First, it must be recognized from the outset that more private banks will certainly lead to problem cases. But, these problems can be handled high protecting the depositors to some extent and punishing the owners of the private bank by closing them when their net worth goes below a specified amount. Second, the recent amendments to the Banking Companies Act restricting ownership to 5 percent is certain to cause difficulties with the development of private banks. While the idea of restricting the concentration of economic power is a valid objective, this can be better achieved through the issuance of many bank licenses. Third, the question of more foreign banking may be conceded. If respectable foreign retail and merchant banks are interested in opening up branches, then these banks should be encouraged to start up business. Foreign banks are one of the best ways to encourage private foreign investment.

At present the policy towards new financial institutions in Bangladesh is a case by case approach. There is no strategic policy with respect to the vision of how the financial system would develop. At present Bangladesh has a branch banking system, i.e. a few banks each with a large member of branches in contrast with a unit banking system comprising a large number of banks each with a few branches. The relevant question is what is an optimal banking structure for Bangladesh.

The advantage of a large branch network is based upon the proposition that deposits are collected from many small depositors and concentrated to fund the loans. One should note that by learning to participate in consortium, large loans can be managed by groups of small banks. Small banks. Small banks can also mobilize funds and make these available to large city banks for lending. The connection between concentration of deposits and large loans within a single bank is not necessary.

The management of the banking sector has two primary objectives: (a) to create competition to ensure efficiency and access to banking services:(b) to perform financial intermediation at low total cost. In the context of Bangladesh these objectives have several implications.

Competition is effective only when there is profit maximizing behavior. This means that the financial institution as no objective other than to earn as much profit as possible. Thus, in particular reference to Bangladesh, this profit maximizing behavior means that (a) employment levels should not be maintained except in so for as it contributes directly to bank profits:(b) salaries and other labor compensation should be managed to promote profit maximization (bonuses are incentive based, etc.) 9c) loans are based on the bank’s assessment, not directed to achieve Government development objectives:(d) banks do not have social objectives. If Government works to encourage loans in some sector, the Government should provide the necessary incentive through direct subsidy.

Any essential deviation from the principle of competition  essential deviation from the principle of competition will lead to a loss of efficiency, reduced return to investments financed  by the banks, and reduced payments to savers (depositors). All of these will reduce the rate to growth of the economy. Experience in Bangladesh and elsewhere suggests that if there are market failures the regulations of Government have generally not succeeded in correcting these. Claims to subsidize sectors to offset market failure cannot be and have not been justified analytically. There is no evidence that one can successfully replace competition by regulation. Encouragement of competition should be the objective of government policy, not its destruction. Often it is the very private interests already in the sector that wish to restrict competition through restricting entry.

A second aspect of competition is to create access to the banking system for all persons with good projects. Access is restricted by a number of behaviors: (a government banks where access to funds is regulated by special programs, official objectives, or traditional regulation:(b) banks controlled by an industrial-trading group where lending is largely made available to or through members of the group. Such banks may not provide access t funds for outsiders. Good projects presented by outsiders may by outsiders may be joined by group interests or in some cases taken over.

This suggests that entry of new banks should be straightforward:  otherwise access of borrower will be restricted. It is a myth that only a few private banks promote competition, may are required. It is myth that only a few private banks promote competition, many are required . It is also a myth that Government intervention can select good investments or that Government enterprises work efficiently. One of the conditions of a competitive market is that when profits rise above normal returns entry should be sufficiently easy that new entrants will increase the level of competition. In Asia there has always been concern that banks will fund largely the financial interest of the owners or the business grouping to which the owners below. The nature of business and investment has tended to emphasize family ownership and management:  the separation of management and ownership that characterizes European, Japanese, and North American industry is far less widespread in South Asia and Bangladesh in particular.

Rationed financial access is characteristic of much of Asia. The transition to a world of separation of ownership and management, with owners solely concerned with the return on their investment is probably decades away. One has to expect strong group and family interests to be manifest by private banks. To insure more equality of access to capital, South Asian Governments have in the past nationalized their banks and encouraged the development of directed leading. The alternative approach to achieving increased competition and greater access to capital is to allow easier entry into the financial sector. There is little that can be done to limit group concentration through their ownership of a bank: but it is feasible to have a large number of groups. As competition increases banks become more efficient and the group orientation can survive only  if the group can generate good projects. One under groups are better than ten.

In Bangladesh efforts are made through the Banking control Act 1991 and amendments thereto, To achieve broad-based ownership and to limit the lending to Directors. The concept of broad-based ownership is promoted by limiting the voting power and ownership of any person to 5 percent of the shares. This concept is acutely difficult to make effective and the private banks, with few exceptions, do not really reflect broad-aced ownership. Instead banks come under control of a group. Such control may be majorette ownership or it may be the confidence of other shareholders in management permits such management to operate the bank. Broad-based ownership, which does not permit bank management to operate with an effective strategy, is not likely to prove beneficial. The willingness of person to invest in banks.

Competition in any economic sector requires relative ease of entry and exit. While sole borrowers may have access to foreign financial institutions, most do not so. Hence effective competition can only result from entry when the potential for high profits exists. This point is often overlooked. If there is a perceived potential to earn a surplus then entry should be available even if there are no supernormal profits being earned by existing banks. There may be technologies or ideas that a new entrant can bring to bear on the sector that will lower production costs. New financial institutions may have better ways to collect loans, establish collateral, design more appropriate financial instruments, etc. is wrong to use a concept of capacity of the banking system to limit entry since this reduces the pressure on existing banks to become more efficient.

The exit question is particularly difficult in the financial sector although in Bangladesh this is a pervasive problem in the economy. A financial firm can leave the market in a number of ways: (a) go out of business or be closed down by the bank supervision authority: (b) merger with another financial institution:(c) take over by the bank supervision authority and subsequently resolved to the public .

These methods are important to insure that unsuccessful financial firms do not continue to risk depositors and government’s money,. The management of failed financial institutions should be fired or demoted.  However, the authorities have generally been permissive in allowing continued operation by existing management of the banks. It is important the inefficient banks be reduced in importance. new banks are needed to provide the necessary financial services while old inefficient banks strive to survive. If the  existing inefficient banks can reform themselves, then they can fight for market share with the new bank s. However, if inefficient, losing banks are left in the market without reduction in size, then the scope for new nanas is reduced and the financial system cannot be improved.

In conclusion, achievement of efficient financial intermediation requires three simultaneous conditions: (a) recognition as par to costs of bad debts and adequate return to capital by the banks: (b) profit maximizing behavior by financial institutions: and (c) effective supervision by the central bank to insure that the banks perform within the prescribed law.

 The Bangladesh Bank should be given responsibility for determining who should receive bank licenses. The issuance of new licenses should be determined with the objective of developing the financial system and should be made without the possibility of political interference. The choice that must be made by the political authorities is whether the nation wants a private, competitive banking system or a state owned system. Once this choice is made, it becomes the responsibility of the central bank to develop satisfactory commercial banking system. For a competitive system, the central bank determines the number of banks it believes appropriate and then awards licenses to achieve this target.

The management of granting licenses should be a routine procedure of the central bank. first, the BB should design agreeing system for applications which reflects the developmental objectives for the financial system. This grading  system should be approved by an appropriate committee to insure if reflects the intent of the government policy. Upon approval, this grading system should be promulgating to the general public.

Second, an application form should be designed, and this should include the following:(a) a business plan including projected balance sheet and profit and loss statement and branch plan:(b) sponsors and their financial history including reputation:(c) a plan for raising the requisite capital: (d) a demonstration of sufficient banking and business experience in the proposed managerial staff. Third, the BB would determine annually the number of new banks to be established during the year based on the need to increase capital in the banking system over the next few years. Finally, applications would be accepted up to a cut-off date and all such graded and ranked. Charters would be granted from the top with a minimum score needed, until the target number was marked or there were no more acceptable proposals.

Conclusions and Policy Implications
The main purpose of this paper has been to examine the relative performance of banking sector in Bangladesh, and to investigate their key problems, and suggest possible remedies. In Bangladesh, the establishment of a market driven private banking system is linked to achieving higher employment, increased productivity, more efficient use of resources and more rapid economic growth.

Financial regulation needs urgent attention to ensure the safety of the financial system during the process of restoring the NCBs to health and as private banking expandnds through privatization and new entry. Prudential regulation and supervision should be upgraded, as should the capacity for enforcement. The legal system requires special attention to safeguard the interest of lenders and  enable them to liquidate collateral in case of default. Finally, accounting and audit standards should be brought up to international levels to support prudential regulation and supervision and to protect lenders. Bangladesh Bank(BB) is the regulator and supervisor of the financial system and is faced with a multitude of difficult banking problems that it must tackle on a large scale. While prudential regulations have been upgraded, much remains to be done to bring them up to international standards. The regulations to be done to bring them up to international standards. The regulations that need to be brought to international standards include capital adequacy, income recognition, asset classification and doubtful bad debt provisions, insider banking, banks’ equity participation in other  companies, lending exposure limits, and liquidity management. Currently, although BB has jurisdiction over issuing bank licenses and bank branching, in practice the cabinet is consulted in most decisions. The application criteria and procedures for banks should be outlined in detail and applicants meeting those criteria should obtain licenses automatically. BB has powers to intervene in problem banks but the procedure is time consuming and inflexible and needs revision.

Loans non performed by one year are considered substandard in Bangladesh but bad by international standards. Many standard loans are actually bad, but it takes years for them to be classified as doubtful and then bad. The cost of bad debts is deferred to the future and many per-1989 bad debts are still not fully provided against. Thus, current borrowers pay high interest rates charged by banks to permit provisioning for bad loans made years ago. Quicker recognition of bad debts, more stringent provisioning requirements and a one –shot full recapitalization of NCBs accompanied by a major management restructuring should lead to lower lending interest rates and avoid a series of NCB recapitalization spread over several years. The one-shot recapitalization would also make current NCB performance more transparent because the impact of poor lending in the past would have been removed.

The regulation limiting bank ownership by one person or group to 5% may need to be relaxed, even though a waiver clause does exist. The regulation has been imposed to prevent the concentration of economic power, but may slow down the privatization of banks and the entry of new institutions. Investors prepared to risk substantial amounts of equity need to have management control. Increased competition and better supervision can check concentration of economic power.

Improved supervision is necessary to lessen the risk of bank failure or losses to depositors. The improvement in bank supervision and bank management information systems will enable Bangladesh Bank to carry out its supervisory functions in a more satisfactory manner. Improved rerouting and supervision of commercial banks will essentially be substituted for releasing commercial banks from direct controls. Finance is an information intensive industry that relies on accurate, timely and transparent information for its functioning and development, Like other South Asian countries, Bangladesh can work with the accounting profession to require all large companies to adopt international accounting and audit standards.

Bangladesh Bank has been reluctant in the past to take action, for political reasons, against banks known to be in bad financial condition except in the most egregious instances of fraud. BB should now intervene more aggressively in troubled banks to develop a sound private system and legal and political barriers to action should private system and legal and political barriers to action should be  dealt with expeditiously and firmly. Delays will prove costly for the Government, and ultimately for the economy. The Bank Deposit Insurance Ordinance was promulgated in 1984. Deposit Insurance is provided for Taka 60,000 per depositor. Membership is mandatory for all banks and the low premium applies to all banks uniformly. The scheme is undefended because of low premiums and lack of investment income and the premium funds are commingled with Bangladesh Bank's funds.

The framework of business laws and legal procedures should facilitate transactions and to enforce contracts in a timely and cost effective manner. Banks and other financial institutions have to be able to foreclose and liquidate collateral in the event of borrower default. Recently several pieces of legislation were passed in Bangladesh to improve its legal framework for the financial system. Among these are the Banking Companies Act, Financial Loan Courts Act, Securities and Companies Commission Act, Act, and the Fi8nancial Institutions Act. The jurisdiction of the financial Loan Courts now needs to be logically extended by amending the law to include the implementation of its decrees. At the moment implementation of Loan Court decrees is done under the Civil procure Code, which takes years and can afford the NCBs little hope of collecting on their collateral within any reasonable time frame. The special foreclosure powers given to development banks have no been used. Thus, much needs to be done to improve contract enforcement, especially to encourage private sector financial institution lending for industrial projects.

Bangladesh Financial System Table 1

Table 1

Bangladesh: Financial System, April 2003

 

Bangladesh Bank

Deposit Money Banks

Nationalized Commercial Banks

Private Commercial Banks

Foreign Banks

Specialized Banks


Sonali Bank

Janata Bank

Agrani Bank


Al-Baraka Bank Bangladesh Limited

Arab Bangladesh Bank Ltd

Bangladesh Commerce Bank Limited

Bank Asia Limited

BASIC Bank Limited (Bank of Small Industries and Commerce Bangladesh Limited)

Dhaka Bank Limited

Dutch-Bangla Bank Limited

Eastern Bank Limited

EXIM Bank Limited

First Security Bank Ltd.

IFIC Bank Limited

Islami Bank Bangladesh Ltd

Jamuna Bank Limited

Mercantile Bank Limited

Muslim Commercial Bank Ltd.

Mutual Trust Bank Ltd.

National Bank Limited

National Credit & Commerce Bank Ltd

One Bank Limited

Oriental Bank ltd (Formerly – Al Arafa Islami Bank ltd.)

Premier Bank Limited

Prime Bank Ltd

Rupali Bank Limited

Shahjalal Bank Limited

Social Investment Bank Ltd.

Standard Bank Limited

The City Bank Ltd.

The Trust Bank Ltd. 

United Commercial Bank Ltd

Uttara Bank Limited


American Express Bank Ltd.

Citibank N.A

Credit Agricole Indosueze

Habib Bank Ltd.

Woori Bank

National Bank of Pakistan

Shamil Bank of Bahrain E.C.

Southeast Bank Limited

Standard Chartered Bank

Standard Chartered Grindlays Bank

State Bank of India

The Bank of Nova Scotia

The Hong Kong and Shanghai Banking Cor. Ltd.

 


Bangladesh Krishi Bank

Rajshahi Krishi Unnayan Bank

Bangladesh Shilpa Bank

Bangladesh Samobaya Bank

Source: Bangladesh Bank, Banking Control Department


Deposits and Advances, Gross Domestic Product (GDP) and Money Supply of All Banks in Bangladesh

Table 2

Total Deposits and Advances of All Banks in Bangladesh: 1981-1992 End Period

(Tk. in Crore)


Period

Deposits

(Depo)

Advances

(Adv)

Growth of

(Depo)

Growth of

(Adv)

June 81

June 82

June 83

June 84

June 85

June 86

June 87

June 88

June 89

June 90

June 91

June 92

Dec. 92

348.26

391.41

511.78

737.50

937.81

1113.66

1334.97

1561.60

1646.25

1910.93

2139.26

2445.33

2600.50

309.69

411.89

471.19

645.66

861.83

1047.29

1129.07

1334.28

1588.69

1903.25

2124.57

2158.58

2248.80

-

12.39

30.76

44.10

27.16

18.75

19.87

16.98

5.42

16.08

11.95

14.31

13.12

-

33.00

14.40

37.03

33.48

21.52

07.81

18.18

19.07

19.80

11.63

1.60

8.60

Source: Bangladesh Bank.

Table 3

Gross Domestic Product (GDP) and Money Supply (M2): 1980-1992

(Tk. in Crore)

Period

GDP

M2/CPI

M2/GDP (%)

GDPG

1980-81

1981-82

1982-83

1983-84

1984-85

1985-86

1986-87

1987-88

1988-89

1989-90

1990-91

191-92

36062.52

36351.02

37659.66

39.241

40.693.30

42459.30

44513.50

45513.50

46660.30

49752.70

51444.20

53618.90

6130

6281

7147

9045

10534

10931

12068

12202

12576

14025

14592

15670

17.00

17.30

19.00

23.00

25.90

25.70

27.30

26.80

26.90

28.20

28.30

29.20

-

0.80

3.60

4.20

3.70

4.34

4.18

2.89

2.52

6.60

3.40

4.23

Source: 1. M2: Bangladesh Bank; as June of each period.

                2. GDP: Bangladesh Bureau of Statistics. 1984-85.

                3. CPI: Bangladesh Bank


Deposits and Advances by Types of Banks-Table4

Table 4

Deposits and Advances by Types of Banks: 1986-93

(Taka Billion in 1989 constant prices) 

 

June 1986

June 1989

June 1992

June 1993

 

Tk.

Billion

%

Share

Tk.

Billion

%

Share

Growth

Rate

Tk.

Billion

%

Share

Growth

Rate

Tk.

Billion

%

Share

Growth

Rate

Deposits:

NCBs

 Domestic Private Banks

 Foreign Banks

Specialized Banks


Advance:

NCBs

Domestic Private Banks

Foreign Banks

Specialized Banks

 

 

 102.82

 29.17

 
 
9.35

 7.53

 

 

82.12

 
20.66

8.36

 36.14

 

 69

 20

 
6

 5

 

 

56

 
14

5

24

 

 115.97

 42.66

 
13.69

8.59

 

 

85.24

 
33.30 

10.51

 37.81

 

 64

 24

 
8

4

 

 

51

 
20

7

22

 

 4.0

 14.0

 
15.9

3.3

 

 

1.2

 
16.3

 11.2

 1.8

 

 141.04

 54.96

 
11.27

10.91

 

 

103.46

 
45.63

7.96

 39.36

 

 65

 25

 
5

5

 

 

53

 
23

4

20

 

 6.7

 8.9

 
-7.7

6.9

 

 

6.6

 
11.7

-10.1

-0.9

 

 155.30

 61.74

 
11.6

13.77

 

 

116.76

 
55.84

9.42

 40.07

 

 63

 27

 
5

5

 

 

53

 
25

4

 18

 

 10.2

 21.4

 
2.9

26.2

 

 

12.8

 
22.4

18.3

 1.8



































Source: BB; Financial sector reform project.


Public and Private Share of Commercial Bank Credit & The Structure of Banking System in Banglade
 
Table 5

Public and Private Share of Commercial Bank Credit: 1989-93

(Present, end of period)

 

 

1989

1990

1991

1992

1993

Public Sector

Private Sector

Total

24.3

75.7

100.0

23.4

76.6

100.0

30.8

69.2

100.0

31.5

68.5

100.0

38.8

61.2

100.0

Source: BB; Financial sector reform project.


Table 6

The Structure of Banking System in Bangladesh

 

Type

Number

Branches

Avg. Br./Bank

NCBs

4

3566

892

Denationalized

2

556

278

Other Private

8

340

43

Specialized

3

1158

386

Foreign

6

22

4

Total

23

5642

256

Source: Bangladesh Bank.


Urban & Rural Branches Distribution and Nationalized & private Banks Productivity Measures

Table 7

Urban and Rural Branches in Bangladesh

 

Type

Urban Branches (%)

Urban Br./Bank

Rural Branches

NCBs

33

300

67

Denationalized

48

130

52

Other Private

100

41

0

Specialized

10

37

90

Foreign

100

4

0

Total

34

84

6

 Source: Bangladesh Bank.

 

Table 8

The Comparative Productivity Measures of Nationalized Commercial Banks and Private Commercial Banks: 1989-92

(Tk. in million)

 

1989

1990

1991

1992

1989

1990

1991

1992

Type of Bank

Deposits per employee

Advances per employee

NCBs

PSBs

2.20

3.94

2.31

4.09

2.67

4.51

2.87

4.97

1.68

3.25

1.88

3.33

1.95

3.80

2.05

3.75

 

Deposit per branch

Advance per branch

NCBs

PSBs

38.06

107.35

40.64

106.63

47.01

120.44

50.52

133.01

29.11

88.51

33.10

86.83

34.60

101.35

36.06

100.41

Source: Annual reports of various banks.


Comparative Margins of Public and Private Commercial Banks

Table 9

The Comparative Margins of Public and Private Commercial Banks: 1989-92

 

 

Aggregate NCBs

Aggregate Private Banks

 

1989

1990

1991

1992

1989

1990

1991

1992

Interest Received 

Interest Paid 

Interest Margin

Other Income

Gross Margin

 Operating Cost

 Staff  Cost

 Other Expenses

 Depreciation Profit (pretax)

 Margin

(Tk. million)

8.84 

7.47 

1.37

 1.08

 2.45

 2.44

1.75

 0.61

0.08


0.01

5.74
 

7.37 

-1.63

3.81

 2.18

 2.23

1.59

 0.50

0.08

 
-0.05 

8.62

7.23 

1.39

0.66

 2.05

 2.14

1.53

 0.53

0.08

 
-0.09

7.12

6.59 

0.53

0.85

 1.38

 2.23

1.65

 0.51

0.08

 
-0.86

8.97

7.95

1.02

1.73

 2.74

 2.47

1.16

 1.00

0.32

 
0.27

10.14

8.06 

1.82

2.03

 3.86

 2.65

1.23

 1.10

0.31

 
1.21 

9.88

8.06 

1.82

2.03

 3.86

 2.65

1.23

 1.10

0.31

 
1.21

9.49

7.75 

1.74

2.02

 3.76

 2.50

1.21

 1.00

0.08

 
1.25

Total Year end Assets

Average Assets

160,804

 
141,717

177,485

 
169,145

200,620

 
189,053

215,393

 
208,132

22,393

 
20,749

24,810

 
23,601

29,462

 
27,136

32,746

 
31,104

Source: Bangladesh Bank.

 

Productive Efficiency of Selected Public, Private Sector Bank and Islami Bank

Table 10

Productive Efficiency of Selected Public, Private Sector Bank and Islami Bank Bangladesh Limited:   1984-1992

(in Taka)

 

1984

1985

1986

1987

1988

1989

1990

1991

1992

 

PUBLIC SECTOR BANKS1

1. Fund Utilization                         Rate (%)

 

2. Per employee Deposit Mobilization in “000” tk.

 

3. Per employee Fund Utilization in “000” tk.

 

 

 

 

 

81.98

 

 

 

1242

 

 

 

 

993

 

 

 

 

84.09

 

 

 

1451

 

 

 

 

1148

 

 

 

 

78.94

 

 

 

1566

 

 

 

 

1193

 

 

 

 

75.95

 

 

 

1735

 

 

  

 

1247

 

 

 

 

85.05

 

 

 

1895

 

 

 

 

1409

 

 

 

 

85.49

 

 

 

2137

 

 

 

 

1673

 

 

 

 

80.58

 

 

 

2305

 

 

 

 

1656

 

 

 

 

 

 

 

75.59

 

 

 

2644

 

 

 

 

1717

 

 

 

 

78.80

 

 

 

3043

 

 

 

 

1916

 

PRIVATE SECTOR BANKS2

1. Fund Utilization                         Rate (%)

 

2. Per employee Deposit Mobilization in “000” tk.

 

3. Per employee Fund Utilization in “000” tk.

 

 

 

 

62.96

 

 

 

3187

 

 

 

 

1993

 

 

 

 

 

 

67.36

 

 

 

2884

 

 

  

 

1918

 

 

 

 

76.84

 

 

 

2812

 

 

  

 

1900

 

 

 

 

79.51

 

 

 

3337

 

 

 

 

2361

 

 

 

 

83.96

 

 

 

3489

 

 

 

 

2538

 

 

 

 

87.43

 

 

 

3888

 

 

 

 

2954

 

 

 

 

87.42

 

 

 

4111

 

 

 

 

2970

 

 

 

 

88.87

 

 

 

4351

 

 

 

 

3143

 

 

 

 

92.09

 

 

 

4569

 

 

  

 

3491

 

ISLAMI BANK BANGLADESH LTD.

1. Fund Utilization                         Rate (%)

 

2. Per employee Deposit Mobilization in “000” tk.

 

3. Per employee Fund Utilization in “000” tk.

 

 

 

 

84.70

 

 

 

 

2185

 

  

 

1573

 

 

 

 

73.02

 

 

 

 

2901

 

 

  

1801

 

 

 

 

70.69

 

 

 

 

3133

 

 

 

1882

Table 11

The Profitability of Selected Public, Private Sector Banks and Islami Bank Bangladesh Limited:    1984-1992

(in Taka)

 

1984

1985

1986

1987

1988

1989

1990

1991

1992

 

PUBLIC SECTOR BANKS1

1. Income - Expn. ratio

 

2. Profit - Expn. Ratio

 

3. Profit - Lon able fund ratio

 

4. Profit - Employed Fund ratio

 

 

 

 

 

1.19

 

   0.19

 

 

0.016

 

 

0.020

 

 

 

 

1.16

 

0.16

 

 

0.016

 

 

0.019

 

 

 

 

 

 

1.13

 

0.13

 

 

0.014

 

 

0.017

 

 

 

 

1.05

 

0.05

 

 

0.006

 

 

0.008

 

 

 

 

1.05

 

0.05

 

 

0.005

 

 

0.006

 

 

 

 

 

1.01

 

0.01

 

 

0.001

 

 

0.001

 

 

 

 

1.01

 

0.01

 

 

0.001

 

 

0.001

 

 

 

 

 

 

1.00

 

0.00

 

 

0.00

 

 

0.000

 

 

 

 

1.03

 

0.03

 

 

0.001

 

 

0.001

 

PRIVATE SECTOR BANKS2

1. Income - Expn. ratio

 

2. Profit - Expn. Ratio

 

3. Profit - Lon able fund ratio

 

4. Profit - Employed Fund ratio

 

 

 

 

 

1.32

 

 

0.32

 

 

0.022

 

 

0.035

 

 

 

 

1.37

 

 

0.37

 

 

0.036

 

 

0.053

 

 

 

 

1.28

 

 

0.28

 

 

0.031

 

 

0.041

 

 

 

 

1.23

 

 

0.23

 

 

0.028

 

 

0.035

 

 

 

 

1.21

 

 

0.21

 

 

0.026

 

 

0.031

 

 

 

 

1.05

 

 

0.05

 

 

0.007

 

 

0.008

 

 

 

 

1.13

 

 

0.13

 

 

0.019

 

 

0.022

 

 

 

 

1.13

 

 

0.13

 

 

0.018

 

 

0.020

 

 

 

 

1.13

 

 

0.13

 

 

0.018

 

 

0.020

ISLAMI BANK BANGLADESH LTD.

 

1. Income - Expn. ratio

 

2. Profit - Expn. Ratio

 

3. Profit - Lon able fund ratio

 

4. Profit - Employed Fund ratio

 

 

 

 

 

1.24

 

 

0.24

 

 

0.016

 

 

 

0.013

 

 

 

 

1.11

 

 

0.11

 

 

0.008

 

 

 

0.011

 

 

 

 

1.06

 

 

0.06

 

 

0.005

 

 

 

0.07

 

 

 

 

1.09

 

 

0.18

 

 

0.015

 

 

 

0.017

 

 

 

 

1.19


Operational efficiency of Public, Private Sector Banks and Islami Bank
 

Table 12

Operational efficiency of Selected Public, Private Sector Banks and Islami Bank Bangladesh Limited   :   1984-1992

(in Taka)

 

1984

1985

1986

1987

1988

1989

1990

1991

1992

 

PUBLIC SECTOR BANKS1

1. Per employee administrative cost

 

2.Administrative cost per taka employed

 

 

 

 

28,181

 

 

 

 

0.03

 

 

 

 

 

 

 

 

37,087

 

 

 

 

0.034

 

 

 

 

 

 

 

 

40,067

 

 

 

0.036

 

 

 

 

 

 

 

 

41,777

 

 

 

 

0.036

 

 

 

 

 

 

 

 

45,533

 

 

 

 

0.036

 

 

 

 

 

 

 

 

53,785

 

 

 

 

0.033

 

 

 

 

 

 

 

 

56,660

 

 

 

 

0.034

 

 

 

 

 

 

 

 

63,024

 

 

 

 

0.037

 

 

 

 

 

 

 

 

72,237

 

 

 

 

0.038

 

PRIVATE SECTOR BANKS2

1. Per employee administrative cost

 

2. Administrative cost per taka employed

 

 

 

 

86,859

 

 

 

 

0.044

 

 

 

 

 

 

 

99,020

 

 

 

 

0.052

 

 

 

 

 

 

 

97,456

 

 

 

0.051

 

 

 

 

 

 

 

115,173

 

 

 

0.049

 

 

 

 

 

 

 

108,992

 

 

 

0.043

 

 

 

 

 

 

 

114,976

 

 

 

0.039

 

 

 

 

 

 

 

124,478

 

 

 

0.042

 

 

 

 

 

 

 

130,910

 

 

 

0.042

 

 

 

 

 

 

 

132,433

 

 

 

0.038

 

 

 

 

ISLAMI BANK BANGLADESH LTD.

1. Per employee administrative cost

 

2. Administrative cost per taka employed

 

 

 

 

 

 

 

 

64,261

 

 

 

 

0.041

 

 

 

 

 

 

 

 

57,885

 

 

 

 

0.032

 

 

 

 

 

 

 

 

76,685

 

 

 

0.041

 

 

 

 

 

 

 

 

83,056

 

 

 

 

0.033

 

 

 

 

 

 

 

 

91,304

 

 

 

 

0.030

 

 

 

 

 

 

 

 

106,287

 

 

 

0.039

 

 

 

 

 

 

 

 

124,643

 

 

 

0.032

 

 

 

 

 

 

 

 

139,657

 

 

 

0.033

 

 

 

 

 

 

 

 

166,698

 

 

 

0.034

 

 

Source    :               Annual report of the concerned banks.

Notes     :               1Public Sector Banks include the Sonali, Janata and Agrani Bank.

2Private Sector commercial Banks include the City Bank Limited, National Bank Limited, United commercial Bank Limited and Arab-Bangladesh Bank Limited.


Composite productivity Index of Private Sector Bank and Islami Bank Bangladesh Limited
 

Table 13

Composite productivity Index of Private Sector Bank and Islami Bank Bangladesh Limited:  1984-1992

 

(in Taka)

 

1984

1985

1986

1987

1988

1989

1990

1991

1992

 

PUBLIC SECTOR BANKS1

1. Profit - employed fund Ratio

 

2. Administrative cost per Taka Employed

 

3. Composite Index of Operational Efficiency(1\2)

 

 

 

 

0.020

 

 

 

 

0.030

 

 

 

 

0.67

 

 

 

0.019

 

 

 

 

0.034

 

 

 

 

0.56

 

 

 

0.017

 

 

 

 

0.036

 

 

 

 

0.47

 

 

 

0.008

 

 

 

 

0.036

 

 

 

 

0.22

 

 

 

0.006

 

 

 

 

0.035

 

 

 

 

0.17

 

 

 

0.001

 

 

 

 

0.033

 

 

 

 

0.03

 

 

 

0.001

 

 

 

 

0.034

 

 

 

 

0.03

 

 

 

 

 

 

0.00

 

 

 

 

0.037

 

 

 

 

0.00

 

 

 

0.001

 

 

 

 

0.038

 

 

 

 

0.03

 

PRIVATE SECTOR BANKS2

1. Profit - employed fund Ratio

 

2. Administrative cost per Taka Employed

 

3. Composite Index of Operational Efficiency(1\2)

 

 

 

 

 

 

0.035

 

 

0.044

 

 

 

 

0.80

 

 

 

 

 

 

 

0.035

 

 

0.052

 

 

 

 

1.02

 

 

 

 

 

0.041

 

 

0.051

 

 

 

 

0.80

 

 

 

 

 

0.035

 

 

0.049

 

 

 

 

0.71

 

 

 

 

 

0.031

 

 

0.043

 

 

 

 

0.72

 

 

 

 

 

0.008

 

 

0.039

 

 

 

 

0.21

 

 

 

 

 

0.022

 

 

0.042

 

 

 

 

0.52

 

 

 

 

 

0.020

 

 

0.042

 

 

 

 

0.48

 

 

 

 

 

0.020

 

 

0.038

 

 

 

 

0.53

Source    :               Annual report of the concerned banks.

Notes     :               1Public Sector Banks include the Sonali, Janata and Agrani Bank.

2Private Sector commercial Banks include the City Bank Limited, National Bank Limited, United commercial Bank Limited and Arab-Bangladesh Bank Limited.


Lending to different sectors by Public, Private and Islami Bank
 

Table 15

Lending to Various sectors by Selected Public, Private Sector Banks and Islami Bank Bangladesh Limited:   1984 – 1992

 

In (%)

 

Public sector Banks1

Private Sector Banks2

Islami Bank Bangladesh Ltd.

 

1984

1992

1984

1992

1984

1992

 

1. Agri, Hunting, forestry and fishing

 

2. Manufacturing

 

3. wholesales and retail trade, rest & Hotels

 

4. Insurance, Real Estate and Business serv.

 

5. Transport, Storage & Commune.

 

6. Others

 

 

9.54

 

 

 

31.88

 

23.77

 

 

 

4.84

 

 

 

1.61

 

 

 

28.38

 

5.65

 

 

 

40.56

 

20.32

 

 

 

6.21

 

 

 

1.15

 

 

 

26.11

 

0.22

 

 

 

30.68

 

30.46

 

 

 

7.86

 

 

 

1.57

 

 

 

28.91

 

0.28

 

 

 

31.96

 

37.54

 

 

 

10.55

 

 

 

1.24

 

 

 

18.43

 

 

1.07

 

 

 

23.85

 

57.58

 

 

 

3.75

 

 

 

1.71

 

 

 

11.17

 

0.26

 

 

 

11.07

 

59.91

 

 

 

2.92

 

 

 

1.59

 

 

 

24.6

 

100.00

100.00

100.00

100.00

100.00

100.00


Source    :               Ministry of finance: “resume of the Activities of Financial Institutions of Bangladesh”, 1992 –                          93.

Notes     :               1Public Sector Banks include the Janata and Agrani Bank.

2Private Sector commercial Banks include the City Bank Limited, National Bank Limited, United commercial Bank Limited and Arab-Bangladesh Bank Limited.

Portfolio structure of Financing by Public and Private and Islami Banks Bangladesh
 

Table 16

The Portfolio structure of Financing by Public and Private Sector Banks and the Islami Bank Bangladesh Limited:

 

 

Public Sector Banks1

Private Sector Banks2

1984

1992

1984

1992

 

1. money at Call and Short Notice

 

2. Loans, Overdraft & cash Credit Employed fund Ratio (%)

 

3. Bills Purchased and Discounted employed fund ratio (%)

 

4. Investment in securities Employed fund Ratio (%)

 

Total

 

 

10.93

 

 

71.57

 

 

 

6.00

 

 

 

33.47

 

 

100

 

3.31

 

 

69.02

 

 

 

3.45

 

 

 

24.22

 

 

100

 

 

 

0.75

 

 

69.55

 

 

 

12.36

 

 

 

17.34

 

 

100

 

 

5.19

 

 

79.10

 

 

 

1.79

 

 

 

13.93

 

 

100

 

 

ISLAMI BANK BANGLADESH LTD.

 

 

 

1984

 

 

1992

 

1. Short Term financing (TDR) – Employed Fund ratio (%)

 

 

2. Term Financing (Musharaka, Hire Purchase) – Employed Fund Ratio (%)

 

 

3. Trade Financing (Murabaha, Bai-Muazzal) – Employed Fund Ratio (%)

 

 

4. Investment Against Securities – Employed Fund ratio (%)

 

 

5. Others – Employed Fund Ratio (%)

 

Total

 

 

 

1.13

 

 

29.7

 

 

 

69.14

 

 

 

0

 

 

0.02

 

100

 

3.38

 

 

14.72

 

 

 

72.98

 

 

 

0.41

 

 

8.51

 

100

 

 

Source    :               Annual report of respective banks.

Notes     :               1Public Sector Banks include the Sonali, Janata and Agrani Bank.

2Private Sector commercial Banks include the City Bank Limited, National Bank Limited, United commercial Bank Limited and Arab-Bangladesh Bank Limited.

Bibliography
  Bibliography:

01.    Azizur Rahman, “The Economy of Bangladesh – The McMillan Co. of India - 1973

02.    Abdus Samad, Bangladesh Facing the Future”- 1983.

03.    Hassan, M. Kabir. “Financial Repression in Economic Development: A Test of the McKinnon Hypotheses for Bangladesh, Westview Press, 1994.

04.    Hassan, M. Kabir, Duane Nunes, “The Banking Sector and Economic Growth in Developing Countries”.

05.    Hassan, M. Kabir, “The Financial Sector Reform in Bangladesh 1993.

06.    Hassan, M. Kabir & Tariq Hossain “Performance Evaluation of Private Sector Commercial Banks” 1992.

07.    Kamal Siddiqui “The Political Economy of Rural Poverty in Bangladesh LGERD- 1987.

08.    Nafis Ahmed “A New Economic Geography of Bangladesh”- Vikas Publishing House pvt. Ltd. 1976.

09.    Shaw, Edward “Financial Deepening in Economic Development”. New York: Oxford University Press 1973.