Chapter One:
Introduction
A bank is a financial institution that accepts deposits from the public and creates credit. Lending
activities can be performed either directly or indirectly through capital markets. Due to their
importance in the financial stability of a country, banks are highly regulated in most countries.
Most nations have institutionalized a system known as fractional reserve banking under which
banks hold liquid assets equal to only a portion of their current liabilities. In addition to other
regulations intended to ensure liquidity, banks are generally subject to minimum capital
requirements based on an international set of capital standards, known as the Basel Accords.
Economic functions of bank
The economic functions of banks include:
• Issue of money, in the form of banknotes and current accounts subject to cheque or
payment at the customer's order. These claims on banks can act as money because they
are negotiable or repayable on demand, and hence valued at par. They are effectively
transferable by mere delivery, in the case of banknotes, or by drawing a cheque that the
payee may bank or cash.
• Netting and settlement of payments – banks act as both collection and paying agents
for customers, participating in interbank clearing and settlement systems to collect,
present, be presented with, and pay payment instruments. This enables banks to
economize on reserves held for settlement of payments, since inward and outward
payments offset each other. It also enables the offsetting of payment flows between
geographical areas, reducing the cost of settlement between them.
• Accept deposits − Receiving money from individuals and enterprises known as
depositors.
• Dispense payments − Making payments according to the convenience of the depositors.
For example, honoring a check.
• Collections − Bank plays as an agent to collect funds from another banks receivable to
the depositor. For example, when someone pays through check drawn on an account
from a different bank.
• Invest funds − Contributing or spending money in securities for making more money.
For example, mutual funds.
• Safeguard money − A bank is regarded as a safe place to store wealth including jewelry
and other assets.
• Maintain savings − The money of the depositors is maintained, and the accounts are
checked and on a regular basis.
• Maintain custodial accounts − These accounts are maintained under the supervision of
one person but are actually for the benefit of another person.
• Lend money − Lending money to companies, depositors in case of some emergency .
Banks in Bangladesh
Present Structure
The current banking framework in Bangladesh can be broadly classified into two. The first
classification divides banks into three sub-categories — Bangladesh Bank, commercial banks
and cooperative banks.
The second divides the banks into two sub-categories — scheduled banks and non-scheduled
banks. In both of these systems of categorization, the BB, is the head of the banking structure. It
monitors and holds all the reserve capital of all the commercial or scheduled banks across the
nation.
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's
banking industry achieved significant expansion with the entrance of private banks. Now, banks
in Bangladesh are primarily of two types:
•
Scheduled banks
•
Non-scheduled banks
Scheduled Banks: The banks which get license to operate under Bank Company Act, 1991
(Amended up to till date) are termed as Scheduled Banks.
There are 61 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): 2 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.
Private Commercial Banks (PCBs): There are 44 private commercial banks which are majorly
owned by the private entities. PCBs can be categorized into two groups:
Conventional PCBs: 35 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 9 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.
Non-Scheduled Banks: The banks which are established for special and definite objective and
operate under the acts that are enacted for meeting up those objectives, are termed as Non Scheduled Banks. These banks cannot perform all functions of scheduled banks.
There are now 4 non-scheduled banks in Bangladesh which are:
•
Ansar VDP Unnayan Bank,
•
Karmashangosthan Bank,
•
Probashi Kollyan Bank,
•
Jubilee Bank
Contribution of Commercial Bank in Bangladesh
Ø Banks promote capital formation
Ø Investment in new enterprises
Ø Promotion of trade and industry
Ø Development of agriculture
Ø Balance development of different savings
Ø Influencing the economy activity
Ø Implementation of monetary policy
Ø Export promotion cells
Problem of the Banking Sector of Bangladesh
Problem of banking sector is widespread and is not related to banking syst em only. The
regulatory entity should be independent but accountable. Prudential regulation should be limited
to deposit-taking institutions and should be clearly separated from non-prudential regulation.
The problem of lower profitability of bank is that it might reduce the tax and thus make a trace
on fiscal system where bank is the number one source of tax under large tax unit of NBR.
Moreover, the revenue target may face hurdle from another side where lower growth of credit
may affect investment and growth, and thus tax collection.
Possibilities of the Banking Sector of Bangladesh
There are huge possibilities of the banking sector in Bangladesh. These are below:
Ø Banking sector of Bangladesh has a great opportunity to become a major sector of the national
economy.
Ø Bangladesh has huge number of population. This advantage may accelerate expansion and
growth of Bangladeshi banking sector.
Ø Bangladeshi banking sector is very much capable to ensure proper quality of the product
services as per requirement of the global market.
Ø There are nine foreign banks active in Bangladesh, but no Japanese bank yet. So there is huge
prospect for Japanese bank to open their branch in Bangladesh.
Bank Management:
There are many definitions of bank management. In general, bank management refers to the
process of managing the Bank’s statutory activity. Bank management is characterized by the
specific object of management - financial relations connected with banking activities and other
relations, also connected with implementation of management functions in banking.
Bank management governs various concerns associated with bank in order to maximize profits.
The concerns broadly include:
•
Liquidity management,
•
Asset management and Liability management and
•
Capital management
The main objective of bank management is to build organic and optimal system of interaction
between the elements of banking mechanism with a view to profit. Successful optimization of
the "profitability-risk" ratio in a bank lending operations is largely determined by the use of
effective methods of bank management. Ability to take reasonable risk is one of the elements of
entrepreneurship culture in general and banking culture in particular.
Reliability of the bank management is determined by the following characteristics:
•
Management expertise in strategic analysis, planning, policy development and
management functions;
•
quality of planning;
•
risk management (credit, interest rate and currency risks);
•
liquidity management;
•
management of human resources;
•
creation of control systems: audit and internal audit, monitoring of profitability and risks
liquidity;
•
Unified information technology system: integrated automation of workflow, accounting,
current analysis and control, strategic planning.
All the above conditions show themselves during implementation of bank management and its
components.
Differences between Conventional Banking System and Islamic Banking System:
The following are the differences between the Conventional Banking System and Islamic
Banking System.
Conventional Banking System
Islamic Banking System
Money is a product and source of exchange which
has a value to trade.
The asset is a product and money is just a source
of exchange.
Interest is charged based on the time period for
which loan is taken.
The profit earned on trade is the main source of
generating income.
Loss sharing is not applied in conventional banking
Losses can be shared if an entity incurs a loss.
Interest is charged irrespective of business
performance
There is no concept of interest and losses are
shared under Islamic financing.
There is no agreement for exchanging goods and
services during the cash disbursement for operating
finance.
According to Murabaha, Salam and Istisna
contracts while disbursement of funds the
agreement for exchanging the goods and services
is mandatory.
There is no presence of goods and service during
the disbursement of funds. Money expansion may
create inflation.
There is a presence of goods and service during
fund disbursement. Since money is not expanded
there is no inflation which is created.
The business entity increases the prices of goods
and services because of the inflation. The cost of
the product includes the inflation aspect in
determining the price.
There is high control over inflation and no extra
prices are charged by business entities.
Long term financing and bridge loans are not
processed on the basis of capital goods.
Prior to disbursement of cash Musharakah and
diminishing Musharakah deals are done and it
makes sure that capital is available for the project.
The regulatory authorities get loans from the central
bank and with money market operation and this is
done without initiating the capital expenditure.
Once the delivery of goods is confirmed to the
National Investment fund, the government can get
loans from monetary agencies.
Money circulates among few hands and there is no
real growth.
Since real wealth goes into many hands and money
circulates in different people there are multiplying
effects of real wealth.
If the loan is not paid then it becomes a nonperforming loan and it is written off.
If the project is unsuccessful, the management
decides to transfer the ownership to another entity
to overcome the losses.
Debt finance has interest expenses which are part of
taxable income and it causes tax burden on salary
individuals and because of this savings income is
severely affected resulting in a reduction of gross
GDP.
Profits are shared in Mudarabah and Musharakah
and it results in reduced burden over salary
individuals and this will increase the savings and
also the income of the individuals showing a
growth of GDP.
What is difference of Branch Banking and Agent Banking?
1. Branch Banking is a formal body of the main bank. Conversely, Agent Banking is an
informal body of the banking system.
2. Branch Banking requires more resources and operating costs to perform the function,
whereas anyone can do agent banking as it requires very little capital.
3. Branch Banking cannot reach the more remote location due to negative operating costs at
these places, but anyone can do agent Banking and hence has more reach.
4. Branch Banking is an extended part of a parent bank. On the other hand, Agent Banking
is a financial institution doing all the bank functions on its behalf.
5. In Branch Banking, it has the authority to decide by discussing it with higher bodies,
while in Agent Banking, it only has to perform pre-assigned duties of the bank.
Key Differences between Mobile Banking and Internet Banking
The difference between mobile and internet banking can be drawn clearly on the following
grounds:
1. Internet banking is nothing but a banking transaction, carried out over the internet, via,
respective bank or financial institution’s website, under a personal profile, with a
personal computer. Conversely, mobile banking is a service that enables the customer to
perform banking transactions using a cellular device.
2. Mobile banking can be performed with the help of mobile telecommunication devices,
i.e. Mobiles or Tablets. On the contrary, for conducting internet banking transaction, one
needs to use devices like computers or laptops.
3. Mobile banking uses Short message service, mobile application or the web. In contrast,
Internet Banking uses bank’s website
4. In mobile banking, fund transfer is possible with the help of IMPS (Immediate Payment
Service), NEFT (National Electronics Funds Transfer System) or RTGS (Real Time
Gross Settlement). As against, in internet banking, funds can be transferred from one
bank or branch to another, with the help of NEFT (National Electronics Funds Transfer
System) or RTGS (Real Time Gross Settlement).
5. While the number of functions performed by Mobile banking system is limited, internet
banking offers an array of services to their customers .