Question

Provide detailed information about the Banking Industry in Bangladesh with examples and in depth analysis with charts. - Marks 20

Answer 1

Historically, the performance of the banking sector has been weak, characterized by weak asset quality, inadequate provisioning, and negative capitalization of state-owned banks. To overcome these problems, the initial phase of banking reform (1980-1990) focused on the promotion of private ownership and denationalization of nationalized commercial banks (SCBs). During the second phase of reform, Financial Sector Reform Project (FSRP) of World Bank was launched in 1990 with the focus on gradual deregulations of the interest rate structure, providing market-oriented incentives for priority sector lending and improvement in the debt recovery environment

The financial sector in Bangladesh comprises the money and capital markets, insurance and pensions, and microfinance. In addition to the Bangladesh Bank the central bank of Bangladesh-there are four state-owned commercial banks (SCBs), four state-owned specialized banks (DFIs) dedicated to agricultural and industrial lending, thirty domestic private commercial banks (PCBs), nine foreign commercial banks (FCBs), and thirty one non-bank financial institutions (NBFIs). Bangladesh Bank has regulatory and supervisory jurisdiction over the entire banking sub-sector as well as the NBFIs. Most of the institutions in the financial sector are characterized by a mix of public and private ownership. During the first decade of independence, financial system of Bangladesh has been suffering from deep crises. Historically, the performance of the banking sector of Bangladesh has been weak due to weak asset quality, inadequate provisioning, negative capitalization in systemically important state banks and constrained profitability. State banks were at times used to lend to politically important economic sectors and institutions as well as politically linked persons

Financial Sector Reform Initiatives of Banking Sector There were six nationalized commercial banks (NCBs) in Bangladesh until 1982 which are Sonali, Agrani, Janata, Rupali, Pubali and Uttara Bank. Banking system reforms in Bangladesh were required due to the serious weaknesses that threatened to destabilize the banking system, including weak asset quality and capitalization. The more severe weaknesses were at the state-owned commercial banks that were affected by poor credit underwriting standards, politically linked lending, weak management and to some extent, regulatory inaction. The initial phase of financial sector reform initiated in 1982, when the government denationalized two of the six NCBs (Rupali Bank and Pubali Bank) and permitted entry of local private banks. Rupali bank was denationalized in 1986 and transformed into PLC, with the government holding 51% shares. As of December 2007, government share in the paid up capital of Rupali bank was at 93.2%. In order to identify major problems in the financial system and to suggest remedial measures, Bangladesh government formed the ‘National Developing Country Commission on Money, Banking and Credit’ (NCMBC) in 1984. Many private commercial banks which were granted license in the early 1980s were Islami Bank Bangladesh (1983), United Commercial Bank (1983), City Bank (1983), National Bank (1983), Arab Bangladesh Bank (1985) and Al-Baraka Bank (1987). Despite the measures taken, initial round of reform was largely unsuccessful due to influence of vested Private Commercial Banks (PCBs) and State-owned Commercial Banks (SCBs) interest groups which resulted in loan default culture. Subsequently, a World Bank Mission conducted a comprehensive study of the financial sector and suggested reforms relating to fixation of interest rates on deposits and advances, classification of overdue loans, restructuring of capital of NCBs and PCBs and market orientation of banking transactions

According to the Bangladesh Bureau of Statistics (BBS) data, the financial sub-sector's growth dipped to 4.46 per cent in FY 2020 from that of 7.38 per cent in FY 2019.

Its contribution to GDP was 3.39 per cent in FY 2020, which was 3.42 per cent in FY 2019.

The economists said the ongoing coronavirus pandemic hit hard the banking sector transactions in the last quarter of FY 2020, but the sector's growth should not have dropped by such a big margin.

The service sector's growth also dropped by 1.46 percentage points to 5.32 per cent in the FY 2020. But the same in the financial intermediation sub-sector fell sharply by 2.92 percentage points.

Taking the cross-country scenario into account, the capital adequacy of the country‘s banking sector remained low compared to the ratios of neighboring countries as of end-December 2019.

Comparison of capital adequacy indicators of neighboring countries Source: Bangladesh Bank Countries CRAR (%) 2015 2016 2017 2018 2019 India 12.7* 13.3* 13.9* 13.7* 15.1* Pakistan 17.3 16.2 15.8 16.2 17.0 Sri Lanka 15.4 15.6 15.2 15.1 16.5 Bangladesh 10.8 10.8 10.8 10.5 11.6

* Data as of end-September Currently, the local bond market is dominated by redeemable subordinated bonds mainly issued by commercial banks, which help them construct their mandatory secondary capital base through the bond proceeds with a specific tenure. The Bangladesh Bank is implementing Basel III in the local banking industry so that banks are adequately capitalized to avert a systematic risk. To fulfill the Basel III requirements PCBs started to issue perpetual bonds. In this regard, The City Bank and Jamuna Bank got the greenlight from the Bangladesh Securities and Exchange Commission (BSEC) to begin issuing perpetual bonds of BDT400 crore each to strengthen their additional tier-1 capital base ( see a June 24, article City, Jamuna banks to issue Basel III compliant perpetual bonds” ). Other PCBs also looking to issue the perpetual bond in near future to fulfill the Basel III requirement.