Background of the Study

Banks are the backbone of the global economy, providing capital for

innovation, infrastructure, job creation and overall prosperity. Banks also play

an integral role in society, affecting not only spending by individual consumers,

but also the growth of entire industries.

The operations of banks are known as one of the most important economic

activity in the world. Any activity which requires investments and financial

resources undoubtedly requires the involvement of banks and financial

institutions (Haghighat and Nasiri, 2003). Thus, banks have the central role in

the economy (Fethi & Pasioura, 2010). The financial environment of any

economy consists of typically five components, namely: money, financial

instruments, financial institutions, rules and regulations and financial markets.

Among the various financial institutions, banks are a fundamental component

and the most active players in the financial system (Dhanabhakyam & Kavitha,

2012). Bank is a financial intermediary that channels funds from surplus units,

the depositors, to the deficit units, the borrowers, in the process gaining from

the spread of the different interest charged. By the scope of its functions, banks

are the key to economic growth of any economy (Rashid, 2010). Further, banks

are a fundamental component of the financial system, and are also active

players in financial markets (Guisse, 2012). The essential role of a bank is to

connect those who have capital (such as investors or depositors), with those

who seek capital (such as individuals wanting a loan, or businesses wanting to

grow). Banks have control over a large part of the supply of money in

circulation. Through their influence over the volume of bank money, they can

influence in the nature and character of production in any country (Brigham &

Houston, 2011).

Bangladesh has a mixed banking system comprising nationalized, private and

foreign commercial banks. Now-a-days Commercial banks play a key role in

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the economic development of a nation through mobilization of savings and

allocation of credit to productive sectors.

1.2 Objective of the Study

The primary objectives of the study are:

To fulfill the requirement for the completion of (MBA) program.

To understand the role of commercial bank for economic

sustainability

To understand the role of Shahjalal Islami Bank as a commercial bank

for economic sustainability in Bangladesh.

1.4 Methodology of the study

The report was largely involved in accumulation of information from the

published materials and also from the website of data mining guide. This

prepared by using both primary and secondary data.

1.4.1 Primary Data

The primary data are those which are collected afresh and for the first time, and

thus happen to be original in character. To complete this report I have obtained

primary data through: practical desk work, face to face communication with

customers, staffs and officers and my observations.

1.4.2 Secondary Data

Latest annual reports of the sample enterprises have constituted the principal

source of secondary data. The annual reports of the sample enterprises which

contained valuable financial and non-financial information about the corporate

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affairs have been utilized for constructing the reports. Besides, secondary data

also include: research studies, the relevant articles published in highly esteemed

journals, books, different published documents of the bank, and internet etc.

1.5 Scope and limitations of the Study

The scope of the study is limited to commercial bank and the report focuses

mainly on the role of commercial bank for economic sustainability.

I have faced some limitations, when I was preparing this report which is

mentioned below:

The time period for this study was only 2 month which was very short.

Much confidential information was not disclosed by respective personnel

of the department.

As the officers were busy with their daily work, they could provide me

very little time. Sometimes, they didn’t want to supervise due to pressure

of work load.

Such a study was carried out by me for the first time. So, in-experience is

one of the main factors that constituted the limitation of the study.

There is a lack of sufficient secondary data.

During my internship program, I was placed in several sections as per the

wish of the concerned officials. As a result, I could not concentrate on a

particular section/department for my study.

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2.1 Banks

The word “Bank” is said to be derived from the Italian word “banco” i.e. bench.

The early bankers, the Jews in Lombardy, transacted their business at benches

in the market place. When a banker failed, his banco used to be broken up by

the people. From such circumstance, the word “bankrupt” originated. There are

others, who are of the opinion that the word “bank” is originally derived from

the German word “back”, meaning a joint stock fund, which was, when most of

the Italy was under German occupation, Italianized into “banco”. This appears

to be more reasonable.

Whoever, being an individual, firm, company or corporation, generally deals in

the business of money and credit is called a bank. In our country, any institution

which accepts, from the public, repayable on demand or otherwise, and

withdraw able by cheque, draft, order or otherwise, is called a bank.

“A bank is an institution which creates money with money” ---W Hock

“A bank is a firm or institution doing a bonafide banking business” ---

Geoffrey Crowther

“A bank is an institution, whose debts are commonly accepted in final

settlement of other people’s debts” ---R S Sayers

A narrower and more common definition of a bank is a financial intermediary

that accepts, transfers, and, most important, creates deposits. This includes such

depository institutions as central banks, commercial banks, savings and loan

associations, and mutual savings banks.

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2.2 Banking

Ordinarily, all functions of a bank in the course of its business may be termed as

banking. In the Banking Companies Act, 1991 (Act 14 of 1991), the word

“banking” has been defined to mean the accepting, for the purpose of lending or

investment, of deposits of money from the public, repayable on demand or

otherwise, and withdraw able by cheque, draft, order or otherwise. But any

company which is engaged in the manufacture of goods or carries on any trade

and which accepts deposits of money from the public merely for the purpose of

financing its business is excluded from being deemed to transact the business of

banking.

Banking, transactions carried on by any individual or firm engaged in providing

financial services to consumers, businesses, or government enterprises. In the

broadest sense, a bank is a financial intermediary that performs one or more of

the following functions: safeguards and transfers funds, lends or facilitates

lending, guarantees creditworthiness, and exchanges money. These services are

provided by such institutions as commercial banks, central banks, savings

banks, trust companies, finance companies, life insurers, and investment

bankers.

2.3 ROLE OF COMMERCIAL BANKS for ECONOMIC Sustainability

Various economists have different views about the role of commercial banks for

economic sustainability.

Schumpeter says, “It is the banking system which serves as a key agent along

with the entrepreneur in the process of economic sustainability”.

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According to Prof. Cameron in his “Banking and Economic Development”, “a

banking system may make a positive contribution to economic growth and

development.”

Commercial Bank

A commercial bank is something with which every one of us is well

known. However different bankers and economists have defined it in a different

way: 

According to Kent:

“An organization whose principal operations are concerned with the

accumulation of the temporarily idle money of the general public for the

purpose of advancing to others for expenditure.”

According to Banking Companies Ordinance 1962:

“Banking means the accepting for the purpose of lending or investing of

deposits of money from the public repayable in demand or otherwise and

withdraw-able by cheque, draft order or otherwise.”

From above definitions, we conclude that bank is an institute, which is

established for the depositing, withdrawing and borrowing money.

Role -Or- Importance for Economic sustainability

Commercial banks play an important role in the process of economic

development, which is clear from the following points:

1. Capital Accumulation or Formation

Capital formation refers to the increase in the existing stock of capital goods

in an economy. Commercial banks remove the capital deficiency by

encouraging saving and investment. The commercial banks can promote capital

formation in the country by moving the resources to the productive uses.

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2. Mobilization of Savings

There operates vicious circle of poverty in developing countries like

Bangladesh. So, savings remain at the lowest level. Savings of people are very

low due to international demonstration effect in Bangladesh. Banks are playing

important role in the mobilization of saving by introducing a variety of saving

schemes. Banks induce the people to earn interest through saving and it

provides various facilities in a country to create a will and power to save.

3. Availability of Funds

An additional point of role of banks is more availability of funds. Poor

population has poor resources for the economic development in poor countries

like Bangladesh. the activities like inventions and innovations, research and

development and initiatives (effectiveness in responding to challenges) are

impossible due to insufficiency of funds in these countries. Banks remove the

deficiency of capital by providing different types of funds that leads to

economic development.

4. Attaining Self Sufficiency

A major problem faced by the developing countries is burden of foreign

debts and dependence on other countries. Commercial banks provide incentive

for the entrepreneurs to take risks and to use idle resources for more and better

production. So, banks are helpful in attaining self-sufficiency. Banks provide

loan to develop the various economic sectors. It results in reduction in imports

and increase in exports. Accordingly, banks are very important to achieve the

self-sufficiency.

5. Implementation of Modern Technology

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Economic development without use of advanced and the most up-to-date

technology is impossible. Almost in all the economic sectors backward

techniques of productions are used due to poverty in third world countries like

Bangladesh. Commercial banks provide more funds to people to make it

possible to use the modern techniques of production. Due to implementation of

modern technology, there is increase in production level, decrease in cost and

save in time.

6. Development of Agriculture Sector

All the regions and all the sectors of the economy are not equally efficient

and developed in an economy. There is big need to develop the backward

regions and sectors for the economic development. Rural areas and agricultural

sector is still backward n Bangladesh. Banks are playing an important role in the

development of rural and agriculture sector. A commercial bank has a major

role in development of rural and agriculture sector.

7. Development of Industrial Sector

Industrial sector is the backbone of their economies in rich nations. It is still

backward in Bangladesh and other poor countries. Commercial banks provide

different types of loans for the development of industrial sector. Some special

industrial development commercial banks. are provided their remarkable

services for the development of industrial sector. Industrial development leads

to agricultural development and it results in economic development

8. Expansion of Market

Commercial banks help in the expansion of market. They help in the

formation of sound economic infrastructure in order to raise living standards

and to expand trade and commerce of an economy. Commercial banks cause

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development of industrial as well as agriculture sector. Accordingly, there is

expansion of market that results in economic development.

9. Research and Development

Commercial banks, sometimes, provide finances for research and

development, which leads to inventions and innovations. Various institutes in

Bangladesh are operating by the loan provided by the banks. Modern techniques

are established and these are applied to economy in research institutes. Due to

use of modern techniques of production, better quality and more quantity is

produced which leads to improve the living standard of population.

10. Essential for Foreign Trade

Foreign trade is one of the most important needs of all the countries of the

world. Today international trade, without involving banks, is so difficult.

International trade is necessary for the economic development. Commercials

banks are helpful in increasing international trade through following ways:

i. Provision of credit facilities

ii. Low rate of interest for the exporters

iii. Opening of letter of credit (L/C)

iv. Arrangement of foreign exchange

v. Opening of foreign currency accounts

vi. Commercial banks have above $ 5 billion of foreign

exchange reserves

11. Remove Budget Deficits

The commercial banks are very helpful for the government. Now a day, the

government has to face the budget deficits because of increased expenditures

and falling revenues. In this situation, government has to depend upon deficit

financing to meet the budget deficits. To cover the gap between the

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expenditures and revenues, government borrows from the banks. As a result, the

development process can be started through borrowed money from banks.

12.  Optimum Utilization of Resources

Commercial banks help in the just and optimum allocation of resources.

Some mega projects cannot be started due to the lack of capital. Commercial

banks provide loans and remove the problem of deficiency of capital. Due to

use of resources in an economy, there is increase in production, income and

employment etc. Increase in these things leads to economic development.

Natural resources contribute to GDP just less than 1 %.

13. Surplus in Balance of Payment

Developing countries are facing the problem of deficit in their balance of

payment. Commercial banks are helpful to overcome this problem. Due to

commercial banks, a country can improve its economy and can attain the self-

sufficiency all this causes in favourable balance of trade. So, banks are helpful

for the surplus in balance of payment.

14. Creators and Distributors of Money

Creation of money and distribution of money are the two main objectives of

commercial bank. Commercial banks move the finances toward productive

uses. There are a lot of problems in the way of economic development like

inflation, deflation, low investment and saving etc. All these problems are

possible to remove through creation and distribution of money by commercial

banks. So, fluctuation in the supply of money can attain the economic

development.

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15.  Provision of Valuable Services

The commercial banks are providing a lot of valuable services for the

economic development. Some of the most important services provided by

commercial banks are as under:

               i.            Due to use of credit instruments like cheques, drafts and

bills of exchange, banks have reduced the use of currency at the cheapest costs

and in the safest manner.

                     ii.            Banks serve as business and commercial agents of their

customers.

                         iii.            Banks provide locker facility.

                          iv.            Banks accept the various utility bills.

                             v.            They guide the investors while making investment

decisions.

vii. Banks advance loans for education in foreign countries.

16. Modern Facilities

Now commercial banks are providing various modern facilities like:

Internet banking

ATM & Online facilities & Balance ready cash etc

Mobile Banking and Call Centers, Smart Card and Debit

Card

DD issuance, Statement inquiry and credit cards.

17. Provision of Finance and Credit

Commercial banks are a very important source of finance and credit for industry and trade. Credit is a pillar of development. Credit lubricates all commerce and trade.

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Banks become the nerve centre of all commerce and trade. Banks are instruments for developing internal as well as external trade.

18. Monetization of Economy

An underdeveloped economy is characterized by the existence of a large non-monetized sector. The existence of this non-monetized sector is a hindrance in the economic development of the country.

The banks, by opening branches in rural and backward areas can promote the process of monetisation (conversion of debt into money) in the economy.

19. Innovations

Innovations are an essential prerequisite for economic development. These innovations are mostly financed by bank credit in the developed countries.

But in underdeveloped countries, entrepreneurs hesitate to invest in new ventures and undertake innovations largely due to lack of funds.

Facilities of bank loans enable the entrepreneurs to step up their investment on innovational activities, adopt new methods of production and increase productive capacity of the economy.

20. Implementation of Monetary Policy

Economic development need an appropriate monetary policy. But a well-developed banking is a necessary pre-condition for the effective implementation of the monetary policy.

Control and regulation of credit by the monetary authority is not possible without the active co-operation of the banking system in the country.

21. Encouragement to Right Type of Industries

Banks generally provide financial resources to the right type of industries to secure the necessary material, machines and other inputs. In this way they influence the nature and volume of industrial production.

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22. Regional Development

Banks can also play an important role in achieving balanced development in different regions of the country. They transfer surplus capital from the developed regions to the less developed regions, where it is scarce and most needed.

This reallocation of funds between regions will promote economic development in underdeveloped areas of the country.

23. Fulfillment of Socio-economic Objectives

In recent years, commercial banks, particularly in developing countries, have been called upon to help achieve certain socio-economic objectives laid down by the state.

For example, nationalized bank in India have framed special innovative schemes of credit to help small agriculturists, self-employed persons and retailers through loans and advances at concessional rates of interest.

Banking is thus used to achieve the national policy objectives of reducing inequalities of income and wealth, removal of poverty and elimination of unemployment in the country.

 

Thus, banks in a developing country have to play a dynamic role. Economic development places heavy demand on the resources and ingenuity of the banking system. It has to respond to the multifarious economic needs of a developing country. Traditional views and methods may have to be discarded.

“An Institution, such as the banking system, which touches and should touch the lives of millions, has necessarily to be inspired by a larger social purpose and has to sub serve national priorities and objectives.” A well-developed banking system provides a firm and durable foundation for the economic sustainability of the country.

2.4 Banker

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“Any person carrying on the business of banking is a banker”---British

Stamp Law (1881)

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3.1 Introduction

The problem of development is a continuing one. No country, be it developed or

developing, can regard itself as having reached the peak of its development

effort. Attainment of the desired level of economic development is targeted by

the developing economies for a number of reasons viz. increasing population,

scarce resources, high rate of unemployment, technological backwardness, low

level of the standard of living, etc. The process of economic development needs

capital formation besides other structural changes like improvement in skill and

efficiency of manpower, better organization, health and education system, etc.

Capital formation is deemed as the most significant variable of economic

development. An efficient and well-organized financial system contributes to

the much-desired economic development through capital formation which can

be divided into three stages viz., savings, financing and investment. Commercial

banks constitute the most important functionary in the whole network of the

financial system for mobilization of savings, intermediation between savers and

investors and allocation of credit to productive sectors and thus play a dynamic

role in the economic development of a nation. Schumpeter regarded the banking

system as one of the two key agents (the other being entrepreneurship) in the

whole process of development. Commercial Banks divert and employ the funds

in such avenues which are aimed to develop a country’s economy and adds to

national wealth. Banks transfer the funds from regions where it is available in

plenty to where it can be efficiently utilized. The distribution of funds between

regions paves the way for the development of backward regions. Commercial

Banks are catalytic agents which can create opportunities for the development

of national resources and provide employment on a large scale. Banks offer

necessary finance to set up and run the industries, and provide finance to

agriculture and other sectors of the economy also. In recent years, banks have

assumed the role of developing entrepreneurship, especially in developing

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countries. Development of entrepreneurship includes, in addition to the

traditional functions of providing loans and working capital, the formation of

project ideas, identification of specific projects suitable to local conditions,

provision of counseling services including technical and managerial guidance.

Historically, the focus of the commercial banking system was entirely short

term, providing only working capital and trade finance. But the areas of

commercial banking have been expanded over time. In the universal banking

system of Germany, commercial banks are also an important source of

investment finance. They function like investment banks and provide

underwriting and brokerage, and they also have considerable control over firms

both through their own equity holding and proxy votes for private investors, and

by appointing representatives on the boards of firms. Even in the USA, the strict

demarcation between commercial banking and investment banking is now the

event of the past. The US Senate on

November 5, 1999 passed a historic legislation to overhaul US banking laws to

allow some US banks into securities and insurance business. Brokers and

insurers will now, in turn, be able to target banks. The legislation repeals parts

of the 1933 Glass-Steagall Act and 1956 Bank Holding Company Act to level

the domestic playing field for US financial firms.

Moreover, an increasing demand on the commercial banks is being noticed in

the developing economies for contribution to economic development through

expansion of branch network, particularly to rural and semi-urban areas,

reorientation of credit flows to the preferred sectors beyond short term maturity

and increased mobilization of savings. The emergence of the independent

Bangladesh in 1971 witnessed a major shift in the banking system in 1972 in

terms of change of ownership i.e., establishment of social control over the banks

through nationalization and change in objectives. The objectives were very

clear--to expand the branch network in unbanked and under banked rural and

semi-urban areas, to step-up monetization activities by having access to

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untapped savings and extend flow of credit to hitherto neglected agriculture and

allied areas and small and cottage industries. As the commercial banks have

structural limitations (short-term sources of funds, lack of adequately skilled

man-power, etc.) in making an entry into term financing for financing agro-

based and industrial projects, specialized financial institutions were created to

fill the vacuum for financing agricultural and industrial development. These

were also known as Development Financing Institutions (DFIs) e.g.,

Bangladesh Krishi Bank, Bangladesh Shilpa Bank, Bangladesh Shilpa Rin

Sangstha, etc. Unlike commercial banks, DFIs did engage themselves in

providing long term finance to the designated sector being heavily dependent

upon the national exchequer and credit lines for generation of funds. In most

cases, they did not have own source of funds for term financing. DFIs have

failed to become self-supporting, autonomous financial institutions capable of

mobilizing resources entirely on commercial terms. Experience indicates that

the

DFIs could not continue their financing operations the way they started. The

reasons being, to some extent the politically motivated directed credit and to

some extent the inefficient credit delivery system, poor monitoring system and

poor entrepreneurship, which ultimately resulted in very low recycling of funds.

This trend has either stopped the DFIs to function at the desired level or down-

sized their scale of operations putting them in a limping state.

The failure of the DFIs to live up to the expectations created a situation in

which the commercial banks, particularly the Nationalized Commercial Banks

were asked to involve themselves in development financing (lending to various

economic sectors) by providing both term loan and working capital. They

expanded credit to those economic sectors mostly with the help of the

concessional funds available to them from the central bank under refinancing

arrangement. However, such directed credit expansion was in many cases

flawed and made without due regard to quality, ultimately leading to inefficient

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resource allocation, widespread loan delinquency and deteriorating health of the

financial system. It is really difficult on the part of the banks to play the

essential role of supporting the economic development of a country with such a

state of health.

Now, one pertinent question may be raised here--what does ’Development

Financing’ actually mean? Two viewpoints can be used to answer this question,

viz., Conventional and Modern. Development financing in the conventional

sense includes provision of both term loan and working capital for financing

agriculture, agro-based projects, small and medium industries, cottage

industries, export, capital market, micro credit for poverty alleviation, etc.

On the other hand, the modern concept of development financing embraces all

types of intermediation activities contributing to the saving-investment process

and allocation and recycling of any type of credit which have direct and indirect

bearing on development. Virtually, bank finance for any activity which is not

counterproductive, upholds the principle of diversified lending with the

minimum of risk and is viable, leads to economic development. The present day

banking predominantly aims at allocating the loanable funds to any economic

activity which ensures viability of the same and recycling of the funds along

with interest. At the advent of the market economy approach to financial sector

development, the modern concept of credit allocation is gradually gaining

popularity among the participating institutions of the banking market in the

developing countries. The traditional viewpoint of credit for financing

development is, however, still dominant amongst the economic and financial

policy makers for expediting economic development through banking window.

This appears to be quite logical and realistic in the developing economy context,

let alone Bangladesh. The development of the rural economy in Bangladesh

through formal financing ought to be the major focal point and in no way be

given residual importance and low profile.

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The reasons are well-pervaded to support the contention (i) around 30 per cent

of the gross domestic product comes from agriculture and a good harvest keeps

the economy well with a comfortable growth rate; (ii) export promotion

(considered to be a breakthrough) depends directly or indirectly on agriculture;

(iii) incidence of rural poverty is significantly higher necessitating the

implementation of effective poverty alleviation programs; (iv) marketing

opportunities for industrial products have to be found out by increasing the

purchasing power of the rural population; (v) viable small and cottage industries

will not only ease the employment problem and also help establish forward

linkages with the technology-driven medium and large industries and backward

linkages with the growers of the farming and nonfarm products; and (vi)

slowing down the migration of the rural people into urban areas by creation of

job opportunities.

3.2 Beginning of Banking in Bangladesh

The people of Bangladesh, having proclaimed independence by the

proclamation of independence of independence established the independent

Sovereign peoples Republic of Bangladesh. After the surrender of the occupied

forces on the 16th day of December, 1971, the Government of the peoples

Republic of Bangladesh formally took over the charge of the administration of

the territories now constitutes Bangladesh. In an attempt to rehabilitate the war

devastated banking of Bangladesh, the Government promulgated a law called

the Bangladesh Bank Order, 1971. By this order The State Bank Of Pakistan

was declared to be deemed as Bangladesh Bank and the offices, branches, and

assets of the said State Bank was declared to be deemed as offices, branches

and assets of the Bangladesh Bank. It was also declared by the said acting

presidents Order No.2 of 1972 that all currency notes and coins issued by the

said state Bank and Government of Pakistan and were in circulation in

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Bangladesh shall be deemed to have issued by the Bangladesh and continue as

legal tender in Bangladesh until otherwise directed. With what has been stated

above, the banking life of Bangladesh started with a legal shape.

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 : The banks which get license to operate under Bank

Company Act, 1991 (Amended in 2003) are termed as Scheduled Banks.

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 56 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 4 SOCBs which are

fully or majorly owned by the Government of Bangladesh.

Specialized Banks (SDBs): 4 specialized banks are now operating which

were established for specific objectives like agricultural or industrial

development. These banks are also fully or majorly owned by the

Government of Bangladesh.

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Private Commercial Banks (BCBs): There are 39 private commercial

banks which are majorly owned by the private entities. BCBs can be

categorized into two groups:

Conventional BCBs: 31 conventional BCBs are now operating in the

industry. They perform the banking functions in conventional fashion i.e.

interest based operations.

Islami Shariah based PBCBs: There are 8 Islami Shariah based BCBs 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.

There are now 4 non-scheduled banks in Bangladesh which are:

Ansar VDP Unnayan Bank,

Karmashangosthan Bank,

Probashi Kollyan Bank,

Jubilee Bank

3.3 Three Decades of Commercial Banking in Bangladesh

The banking in Bangladesh has passed three decades through different policy

environments and comprises central bank at the apex, nationalized commercial

banks (NCBs), private commercial banks (BCBs), foreign commercial banks

(FCBs) and specialized financial institutions (SFIs). In the decade of seventies,

in an atmosphere of fully regulated banking, the nationalized commercial banks

played the active role in intermediation and allocation of credit along with the

specialized financial institutions. The decade of the eighties witnessed the active

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operation of both the NCBs and BCBs (local and foreign) in the banking

market. In the early eighties, two NCBs (Pubali Bank and Uttara Bank) were

denationalised and the BCBs were allowed to function in order to provide a

competitive environment to the NCBs with the major consideration of

improving the customer services. During this period, the banks operated under

strict regulatory framework.

NCBs primarily lent to agricultural, industrial and export sectors following the

Govt. directives while private and foreign banks’ lending primarily went to

trade and commerce. A number of problems were manifested in the banking

sector at that time. To mention a few, these are inadequate mobilization of

savings, widespread loan defaults and delinquencies, and inefficient credit

delivery which ultimately resulted in a retarded economic growth. In the mid-

eighties, revamping the financial sector was felt as a step in the right direction.

The Bangladesh Govt. appointed a National Commission on Money, Banking

and Credit (NCMBC) to undertake a major study of the financial sector in late

1984 which submitted its report in 1986 suggesting the reforms to be brought

about for addressing the problem of loan delinquencies and restoring the

financial stability.

In the early nineties, the economy underwent liberalization process as has been

adopted in different fields through launching structural adjustment program. In

order to redress the structural and operational problems facing the financial

sector (as identified by NCMBC), a good number of reform measures were

introduced in 1990 via World Bank supported Financial Sector Reform Project

(FSRP). At the initial stage two major policy reforms viz. flexible interest rates

and loan classification and provisioning were put in place. Other reform

measures include abolition of refinancing system and introduction of

rediscounting facility by the central bank, establishment of capital adequacy

standards, recapitalization of the NCBs, strengthening of central bank

supervision, enactment of banking related legislation and amendments thereto

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providing wider powers to the central bank, checking insider lending,

incorporating legal provisions for loan recovery, development of human

resources through training, etc. The commercial banks were allowed adequate

freedom in various areas of banking operations including fixation of deposit and

lending rates, service charges, selection of loan portfolio, etc., which were then

administered and regulated by the central bank. The FSRP continued its

operations till 1996. In May 1997, another project named ’Commercial Bank

Restructuring Project (CBRP)’ funded by the World Bank was undertaken to

further consolidate, strengthen and make the banking sector more dynamic.

Besides, a high-powered Banking Reform Committee (BRC) was constituted in

order to carry forward the reform process in the financial sector. The committee

submitted its report in December, 1999 and their recommendations are under

active consideration of the Government.

3.4 Lending and deposit business

A bank’s role as an “intermediary” is clearest in the credit and deposit business.

Clients “bring” to the bank their savings, i.e. the money they have chosen not to

spend. The bank transfers this money to its credit clients in the form of loans.

What is on the face of it extremely simple is nevertheless fraught with a great

many risks. A bank’s loans lack liquidity, either partially or totally. This means

that the bank cannot sell them in return for demand deposits or central bank

funds whenever it likes. On top of this, a borrower’s credit rating may change

during the life of a loan, thereby changing the value of the loan at that point in

time, which reflects the interest and amortization payments expected in the

future. Due to the lack of a secondary market, credits are mostly carried in

balance sheets at their nominal value, with provisions and write-offs only being

formed or effected if there are any indications that the borrower may have

trouble meeting payments or is actually in arrears. In some cases, credits may

even become entirely worthless if borrowers become insolvent and bankrupt.

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3.5 The Role Involvement of Commercial Bank for Economic Sustainability in Bangladesh

An attempt will be made in this paper to examine the nature and extent of

involvement by commercial banks in for economic sustainability in Bangladesh.

In this endeavor, we have considered the following performance indicators of

commercial banks on the basis of availability of data during the period of the

nineties:

1. Network of Branches;

2. Share of Deposits and Advances;

3. Regional Distribution of Deposits and Advances;

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4. Financing Agriculture and Allied Activities;

5. Financing Industries Term Loan and Working Capital;

6. Financing of Export and Import;

7. Financing for Infrastructure; and

8. Financing for Poverty Alleviation.

In many cases, the published data did not enable us to find out the disbursement

trend of the commercial banks for various types of financing. The outstanding

advance figures have been used to indicate the extent of involvement in any

particular sector/activity. However, the increase or decrease of such figures can

not always be attributed to the real increase or decrease of involvement of

financing in any activity during a particular period due to non repayment of

principal and interest of loan amount fallen due as per schedule. Nevertheless,

an indicative picture may be drawn regarding the involvement of banks in

development financing on the basis of outstanding figures. [Though the

scheduled banks’ data have been published as on June 30, 1999, most of the

analysis was done as on December 31, 1998 because of non-availability of data

for all categories. Moreover, the analysis was mostly based on the calendar year

figures.]

3.5.1 Network of Branches

The NCBs have the largest branch network among the commercial banks of

Bangladesh. The network rapidly increased during the years of concentration on

deposit mobilization and provision of banking services in rural areas. As on

June 30, 1999 they had a total of 3616 branches. But the share of NCBs in total

branch network of the banking sector has decreased over the 1990s from 64.1

per cent in 1989/90 to 60.7 per cent in 1998/99 (Table 1).

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The respective share of BCBs in the network has increased during the period

from

14.8 per cent (824 branches) to 19.4 per cent (1160 branches). The number of

branches of FCBs as percentage of branch network of the banking sector is

almost stable over the period (0.5 per cent), having only 32 branches as on June

30, 1999 (Table 1). However, in the recent years, the FCBs have emphasized on

retail banking through branch expansion in the urban areas.

In regard to distribution of branches in urban and rural areas, NCBs occupy

about two thirds of their branch network in rural areas, while BCBs have very

little presence in the rural outlets. The FCBs, however, have no rural branch

network. As on 30 June 1999, 60.6 percent of total bank branches are located in

the rural areas. However, the overall exposure of the banks to rural areas is now

showing a decreasing trend. It should be noted that initially rural branch

expansion was done in many cases without proper feasibility studies. This has

led to the increase of rural loss-incurring branches.

3.5.2 Share of Deposits and Advances

The nationalized and private commercial banks are the backbone of the

financial system of Bangladesh. Till now four NCBs dominate the banking

sector. However, the private banks (local and foreign) are growing and

increasing their market shares. Compared with the distressed nationalized

banking sector, the growth of private banking is a healthy development for a

sound financial system.

In the 1990s, the share of NCBs in total deposits has decreased slightly. As on

Dec.31, 1990 the NCBs accounted for 62.4 per cent of total deposits of the

banking sector, but the share has fallen to 60.2 per cent on Dec. 31, 1998. The

share of BCBs, on the other, has risen from 26.1 per cent to 27.2 percent.

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During this period, FCBs eyed a marginal increase in market share in deposits

from 7.1 per cent to 7.4 per cent (Table 2).

The share of NCBs in total outstanding advances of the banking sector has

slightly shrunken from 52.8 per cent to 51.1 per cent during this period. On the

other hand, the market share of BCBs has increased from 21 per cent to 25.6 per

cent and the share of FCBs has fallen slightly from 5.7 per cent to 5.4 per cent

during this period. As on Dec. 31, 1998 NCBs mobilized 71.2 per cent of total

deposits from urban areas. But the share of rural areas in total deposits

mobilized by NCBs has risen from 26.8 per cent on Dec. 31, 1990 to 28.8 per

cent on Dec. 31, 1998. On the other hand, only 9.7 per cent of total deposits of

BCBs were mobilized from rural areas as on Dec. 31, 1998. The FCBs are

completely absent in rural deposit mobilization activities as they have no rural

branch network (Table 2).

The local BCBs, not to speak of the FCBs, have never been involved in rural

banking in any substantial way. One of the by-products of the denationalization

of both Uttara and Pubali Bank was their move to reduce the number of their

rural branches rapidly. The reasons for gradual withdrawal from rural banking

have been identified as low income generation, high classified credit incidence

and higher transaction cost for finance that transform rural bank branches into

loss incurring units. Having about 61% of total branches, the rural areas are

commanding only around 23% of total deposits. The overall socio-economic

condition of rural areas is responsible for the low level of rural deposit

mobilization. In addition, the bank marketing approach in rural areas is not

customized. Banks have tried to reach the rural customers with the financial

products which they market for urban customers resulting in non-fulfillment of

rural customers’ needs.

The share of rural areas in total advances of NCBs is lagging far behind the

corresponding share in total deposits. As we have shown earlier, 28.8 per cent

of total deposits of NCBs were mobilized from rural areas as on Dec.31, 1998,

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but only 18.9 per cent of total advances of NCBs went to rural areas. The share

of rural areas in advances by BCBs is negligible i.e. 2.2 per cent only as on Dec.

31, 1998. The lending operations of FCBs is completely concentrated in the

urban areas (Table 2).

3.5.3 Regional Distribution of Deposits and Advances

The mobilization of deposits from and dispersal of advances to the various

regions other than the geographical areas of traditional concentration reflect the

policy of following the balanced development financing approach.

The share of Dhaka and Chittagong divisions in total deposits of NCBs, BCBs

and

FCBs were 73.3 per cent, 77.2 per cent and 98.9 per cent respectively as on

Dec. 31, 1998. The share of other four administrative divisions in total

outstanding advances of NCBs, BCBs, and FCBs were only 26.7 per cent, 22.8

per cent and 1.1 per cent respectively (Table 3).

On the other hand, as on Dec. 31, 1998 the share of Dhaka and Chittagong

divisions in total outstanding advances of NCBs, BCBs and FCBs were 77 per

cent, 89.3 per cent and 99.5 per cent respectively. The share of other four

administrative divisions in total outstanding advances of NCBs, BCBs, and

FCBs were only 23 per cent, 10.7 per cent and 0.5 percent respectively (Table

3).

This indicates a very high concentration of deposit mobilization and lending

operations in Dhaka and Chittagong divisions by all types of banks (especially

in case of BCBs and FCBs) at the cost of development of other divisions and

results in pumping out of money from underdeveloped to developed areas

which is contrary to a decentralized development financing strategy.

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3.5.4 Agricultural Financing

Given the role of the agriculture in the economic development of Bangladesh, it

is imperative to invest considerable resources for agricultural development of

the country. The agriculture sector, the lifeline of the rural economy, which

contributes about 30% to the GDP of the country and constitutes the chief

source of supply of food, is continuously being deprived of the needed capital.

The share of agriculture, fishing and forestry in total outstanding advances of

NCBs was 13.2 per cent as on Dec. 31, 1998. The role of BCBs in agricultural

financing is meager due to lack of rural branch network and risk averse

behavior. The share of this sector of the economy in total outstanding advances

of BCBs was only 1.6 per cent as on Dec. 31, 1998. FCBs are almost absent in

agricultural financing (Table 4).

On the other hand, the share of NCBs in the total outstanding advances in this

sector has increased from 40.4 per cent on Dec.31, 1990 to 46.6 per cent on

Dec. 31, 1998. The BCBs account for only 2.7 per cent of total outstanding

advances in this sector (Table 6). In the 1990s, the share of NCBs in agricultural

credit disbursement has been decreased gradually from 33.6 per cent in 1991/92

to 24.5 per cent in 1997/98. From 1994/95 the role of BCBs in agricultural

credit disbursement has been sharply increased. In 1992/93 the BCBs

constituted only 0.5 per cent of total agricultural credit disbursement in the

country, which increased to 9.5 per cent in 1997/98 (Table 7).

The share of private sector in outstanding advances of all banks in agriculture

and allied activities was 90.1 per cent as on Dec. 31, 1998 (Table 5).

It is revealed from the various studies regarding agricultural financing that the

target beneficiaries do not get the required credit at all or receive much less than

the required amount. A few rural rich get most of the loans with the connivance

of bank officials. Those rich farmers who take loan from commercial and

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agricultural banks borrow not because they need working capital for agricultural

activities, but because they take the advantage of low priced institutional credit

which they are able to divert to other profitable activities.

In a study on Grameen Bank, Hossain (1988) reported that 7 per cent of the

rural poor took only 8 per cent of rural institutional loans. Although exploitative

in nature, the rural informal credit system has still been effective in meeting the

short-term credit needs of the poor.

3.5.5 Industrial Term Loans and Working Capital Financing

This is a new phenomenon in commercial bank lending in Bangladesh. Term

loans are designed to fund long and medium term business investments, such as

the purchase of equipment or the construction of physical facilities, covering a

period of more than one year.

Bangladesh does not have a developed capital market. The bulk of the financing

for long term investment is currently supplied by commercial banks as term

loans.

As on Dec. 31, 1998, 33.1 per cent of total outstanding advances of NCBs went

as industrial term loan and 13.1 per cent in working capital financing. The share

of industrial term loans and working capital financing in total loan portfolio of

NCBs has increased in the 1990s (46.2 per cent on Dec.31, 1998 from 42.7 per

cent on Dec. 31, 1990). But the small scale and cottage industries are continuing

to be deprived of getting desired formal sector financing. This sub-sector

constitutes only 3.6 per cent of total loan portfolio of NCBs as on Dec.31, 1998

(Table 4).

Recent studies have shown that informal financing involving high interest rates

has played a critical role in the emergence, survival, and growth of many small-

scale industries in Bangladesh. Availability, rather than cost of credit is thus the

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most binding constraint to growth in industrial investment. As on Dec. 31, 1998,

25.5 per cent of total loan portfolio of BCBs went as industrial term loan and

working capital financing. But the share of small scale and cottage industries

was only 2.7 per cent of total loan portfolio of BCBs. Industrial term loans and

working capital financing accounted for 39.1 per cent of total outstanding loans

of FCBs as on Dec.31, 1998, which has been concentrated in large and medium

scale industries (Table 4).

The share of NCBs, BCBs and FCBs in total outstanding advances in industrial

term loan financing were 57.2, 14.4 and 3.8 per cent respectively as on Dec. 31,

1998. In working capital financing, NCBs, BCBs and FCBs accounted for 64

per cent, 21.8 per cent and 9.5 percent of total outstanding advances

respectively (Table 8).

Table 9 shows the year-wise disbursement of industrial term loans by banks and

nonbank financial institutions from 1990-91 to 1998-99. Here we can observe

an accelerated credit expansion from 1992-93 onwards. The total disbursement

of industrial term loan from institutional sources had increased from Tk 357.92

core in 1990-91 to a record figure of Tk1388.13 core in 1993-94 and then it has

more or less stabilized. The major role in such credit expansion was played by

the NCBs, whose industrial term loan disbursement had increased from a

meager amount of Tk 44.75 core in 1990-91 to Tk 810.68 core in 1994-95. The

share of NCBs in total disbursement of industrial term loans had increased

during the period from 12.5 per cent to 67 per cent. From 1995-96 the dominant

share of NCBs in industrial term loan financing has been gradually decreasing

and in 1998-99, it constitutes only 26.2 per cent.

In the late nineties, on the other hand, the BCBs and FCBs have enhanced their

contributions in industrial financing. The share of BCBs in total disbursement of

industrial term loans has increased from 10.7 per cent in 1995-96 to 22.5 per

cent in 1998-99. The absolute disbursement figure during this period has been

increased from Tk 131.28 core to 299.11 core. The share of FCBs also increased

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from 11.3 per cent (Tk 139.14 core) in 1995-96 to 20.2 per cent (Tk 269.28

core) in 1998-99 (Table 9).

It is worthwhile to mention that in the late nineties the NBFIs have increased the

share in industrial term loan financing from 7.2 per cent (Tk 88.39 core) to 26.2

per cent (Tk348.45 core) through lease financing and equity participation

making it the largest source of institutional financing in this area (Table 9).

The share of private sector in outstanding industrial term loans has increased

from

68.8 per cent to 86.9 per cent during 1990-1998 (Table 5).

So far the maturities of funds are concerned, the commercial banks are ill-suited

to meet the demands of industrial financing. In fact, the practice of ” borrowing

short” and ”lending long” has created a serious mismatch between the assets

and liabilities of the banks.

Fixed deposits of more than one year maturity period constituted 22.2 per cent

in NCBs, 20.7 per cent in BCBs and 28.9 per cent in FCBs respectively (Table

10). The NCBs, given their present liquidity position, are barely able to service

the demand for investment in this sector. The private banks are even less

equipped to undertake term financing on an adequate scale and accordingly had

less involvement. But, it should be noted that attempts to stimulate private

industrial investment with public financing and administered interest rates

during the late 1970s and early 1980s resulted in many pitfalls including

inappropriate investments, inadequate project appraisal, overcrowding in certain

sectors, and widespread debt defaults.

In the context of deregulated environment of present-day banking business,

sectoral allocation of credit based on total reliance on market mechanism may

not yield the desired results. For example, in the case of private banks, trade

financing may be preferred over industrial finance because of quick liquidation

of loans and higher turnover rates. Industrial term lending may get the least

preference because of short deposit maturities. This would definitely put a large

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majority of the potential industrial borrowers outside the orbit of industrial

credit. Again, the small and cottage industry sub-sector would hardly get any

attention of the private sector institutional lenders for their preference to asset-

based lending.

In order to obviate the difficulty of extending industrial term loan out of the

deposit funds having shorter maturities, Agrani Bank has floated a bond to raise

Tk 500 core as a part of a Govt. program to finance new industrial ventures.

One fourth of the Tk. 500 core would be directly invested by the Agrani Bank

while other banks would use the rest of the capital for lending money for

industries on a long-term basis.

3.5.6 Foreign Trade Financing

Trade financing may be both domestic and international. Financing of

international trade has direct relevance to the development of our economy,

particularly in the context of developing countries. In Bangladesh, export being

the thrust sector is financed at the administered interest rate within a band of 8-

10 per cent. Again, import of capital goods, industrial raw materials, semi-

processed inputs, etc are directly linked to economic development. Considered

from this standpoint, if we examine the performance of commercial banks, it

reveals that the share of NCBs and FCBs in the outstanding export credit has

decreased in the nineties (NCBs from 67.5 per cent to 59.2 per cent and FCBs

from 9.6 percent to 3.2 per cent during 1990-1998) over time while BCBs have

registered a slight increase in their share (from 22.4 per cent to 35.3 per cent)

during the period (Table 11).

In the area of import financing, the share of BCBs in outstanding import credit

appears to be much higher relative to other groups of banks and their share has

increased over time in the nineties from 44.6 per cent to 50.3 per cent. The share

of NCBs and FCBs have slightly decreased over the period (Table 11).

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But it should be noted that an increasing trend of outstanding advances in

foreign trade financing does not necessarily indicate the increasing contribution

in this area and may not be a healthy trend indeed. It may be increased due to

stocklot factor and resultant creation of forced loans.

For example, it has recently been reported in ”The Daily Star” appearing on

November 13, 1999 that forced loans worth Tk 882.64 core, which is 30 per

cent of the total loan amount provided by the NCBs to 1,109 RMG units were

created as on September 15,1999 after the NCBs were compelled to shoulder

the import liabilities of back-to-back L/Cs as per the banking system and paid

this money from their own funds, as garments owners did not export their

products in time. Instead of exporting finished products, these garments

manufacturers sold their raw materials in the local market subjecting the banks

to forced loans.

3.5.7 Financing for Infrastructure

Availability of infrastructure is one of the objective conditions of undertaking

development efforts in an economy. A well-knit transport and communication

network facilitates the quick movement of people and goods. Besides,

increasing construction activities comprising housing, office premises and other

ancillary buildings are the manifestations of development.

The share of construction, transport and communication in the loan portfolio of

commercial banks constitutes 6.5 per cent for NCBs, 10.4 per cent for BCBs

and 4.9 per cent for FCBs as on Dec. 31, 1998. On the other hand, the share of

NCBs in total outstanding advances of all banks in this sector of the economy

was 49.1 per cent. The corresponding shares of BCBs and FCBs were 39.4 per

cent and 3.9 per cent respectively (Table 4).

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3.5.8 Financing for Poverty Alleviation

The major objective of economic development has been to alleviate poverty by

uplifting bottom line population to the development stream through institutional

credit. The attainment of this objective deserves urgent attention when about

half of the population of

Bangladesh is considered as poor and one fourth of the population as hard core

poor. In this Endeavour, the role of commercial banks does not appear to be

commendable. As on Dec. 31, 1998 the NCBs and BCBs accounted for 66.5 per

cent and 3.1 percent of total outstanding loans in poverty alleviation programs

of all banks. FCBs did not provide any loan in such programs. The share of

poverty alleviation programs in total outstanding advances of NCBs and BCBs

were only 1.8 per cent and 0.2 per cent as on Dec.31, 1998, which reflects their

meager involvement in this area (Table 12). From the above analysis of

involvement of commercial banks in development financing in Bangladesh we

can draw the following conclusions:

I. NCBs have the largest branch network. However, BCBs’ branch

expansion has taken place at a faster rate during the period as their

share in total branch network is increasing. Although more than 60

per cent of bank branches are located in the rural areas, the current

trend shows that the number of rural branches is decreasing.

II. As on Dec. 31, 1998, NCBs, BCBs and FCBs accounted for 60.2

per cent, 27.2 per cent and 7.4 per cent of total deposits of the

banking sector respectively. On the other hand, the share of NCBs,

BCBs and FCBs in total outstanding advances of the banking

sector were 51.1 per cent, 26.6 per cent and 5.4 per cent

respectively.

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III. 28.8 per cent of deposits of NCBs were mobilized from rural areas,

but only 18.9 per cent of total advances went to rural areas as on

Dec. 31, 1998,. On the other hand, 9.7 percent of deposits of BCBs

were mobilized from rural areas, but only 2.2 per cent of advances

of BCBs went to rural areas during the period. This indicates a net

resource flow from rural to urban areas.

IV. Deposit mobilization and lending operation of commercial banks

are highly concentrated in Dhaka and Chittagong divisions. Other

four administrative divisions are getting much less access to credit

than their share in deposit mobilization. This may lead to regional

disparity in the economy.

V. The share of agriculture in loan portfolio of all banks (15.4 per cent

as on Dec. 31,1998)is much less than the contribution of

agriculture to GDP of the country. Agriculture constitutes a very

negligible share in the loan portfolio of BCBs (1.6 per cent only).

FCBs are almost absent in agricultural financing.

VI. The share of NCBs in outstanding advances in agriculture has

increased in the nineties, but their share in disbursement of

agricultural credit has decreased. This can be explained by non-

recovery of agricultural loans by NCBs.

VII. Rural poor get much less agricultural credit than their rich

counterpart. Experiences have shown that rich borrowers often

divert low-priced institutional credit to other profitable activities.

VIII. The share of industrial term loan and working capital financing in

total loan portfolio of NCBs, BCBs and FCBs were 46.2 per cent,

25.5 per cent and 39.1 per cent respectively as on Dec.31, 1998

(Table 4).

IX. Small scale and cottage industries (SCIs) accounted for only 4.9

per cent of outstanding advances of NCBs in industrial term

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lending as on Dec. 31, 1998. The corresponding share for BCBs

and FCBs are 11.2 per cent and 1.1 per cent respectively. The share

of SCIs in outstanding advances in working capital financing of

NCBs and BCBs were 14.6 per cent, 8.7 per cent respectively. The

FCBs did not provide any working capital financing in SCIs.

X. From the beginning to mid-1990s NCBs played dominant role in

industrial term loan financing. But in the late 1990s the

contribution of NCBs has gradually decreased understandably due

to increase of overdue loans. However, the share of BCBs, FCBs

and NBFIs in disbursement of industrial term loans have increased

during the period.

XI. Increasing trend of outstanding advances in foreign trade financing

does not necessarily indicate the increasing contribution of banks

in this area. It may be increased due to stocklot factor and resultant

creation of forced loans.

XII. Infrastructure i.e. construction, transport and communication have

relatively lower share in the loan portfolio of commercial banks

during the period under study.

XIII. Commercial banks’ involvement in financing for poverty

alleviation of bottom line population of the country is very

insignificant.

3.6 Securities issuing

The universal banks active in the issuing sector face a whole range of potential

conflicts of interest, given that issues often involve various parties from within

and outside the bank and that these parties are not motivated by the same

interests: the issuance unit is interested in the offering, securities trading is

looking for high revenues, asset management clients expect the bank to

safeguard their interests irrespective of its role in the issuing transaction, the

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lending unit may have information on the issuer that is otherwise not in the

public domain, etc. Defusing and controlling potential conflicts such as these

places enormous demands on a bank’s organizational structure, processes and

compliance activities. Only when a bank succeeds in controlling the potential

conflicts and managing them on a transparent basis can the different

stakeholders involved be sure that their legitimate interests are equitably upheld.

3.7 Asset management

Asset management covers a range of banking activities: portfolio management,

investment advisory, securities trading and lending business (collateral loans,

securities lending and borrowing). With a discretionary portfolio management

agreement, clients authorize a bank to undertake, for their account and at their

risk, all the actions it deems appropriate within the framework of the normal

asset management activities of a bank. Clients expect their assets to be managed

professionally and in their best interests. The bank contracts to exercise its

undertaking to the best of its knowledge and abilities, taking into account

clients’ circumstances but acting as it sees fit within the scope outlined as part

of the investment goals defined with the client.

3.8 Foreign exchange trading

The last business I mentioned was foreign exchange trading, an activity which

has been unjustly attacked as “casino capitalism”. Various factors have given

rise to this perception. First, without a doubt the massive amounts traded in the

foreign exchange markets every day. According to figures from the Swiss

National Bank, for example, in April 2001 foreign exchange trades in

Bangladesh alone amounted to CHF 121 billion each working day. (For the

purposes of comparison, the global figure was USD 1,210 billion.) The vast

majority of this trading takes place between financial intermediaries, the aim

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being to exploit even the slightest differences between exchange rates

(arbitrage). Only a very small proportion of this trade issued to finance foreign

trade and hedge foreign currency positions. Furthermore, the fact that serious

economic crises such as the one Argentina is experiencing at present are almost

always currency crises may fuel suspicions that it is currency traders with their

speculative attacks that trigger such developments.

In fact, the very opposite is true. Many people may fail to see the point of the

vast amounts of arbitrage transactions, since they are not primarily used for

financing purposes. In reality, however, they underpin liquidity in the markets,

thus helping them to function smoothly. In less liquid markets, new information

would inevitably lead to much greater volatility in rates. A distinction has to be

made in the case of protracted currency over- or undervaluation’s (in terms of

interest rates and purchasing power parity), which are a genuine problem, as

they could result in the misallocation of resources.

3.9 Mobile Banking in Bangladesh

Now a day it is very popular. Everyone have a mobile banking account. They

transfer money, salary, tuition fee through this easy banking. Creating a vast

amount of job as the banks agent for the mobile banking service and making

money transfer very easy and fast, private banks are helping many industry to

grow faster and easier.

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Page | 40

4.1 Introduction

Shahjalal Islami Bank Limited, a Shariah Based Commercial Bank in Bangladesh was incorporated as a Public limited company on 1st April, 2001 under Companies Act 1994. The Bank commenced commercial operation on 10th May 2001 by opening its 1st branch, i.e. Dhaka Main Branch at 58, Dilkusha, Dhaka obtaining the license from Bangladesh Bank, the Central Bank of Bangladesh. Its Head Office is situated at 2/B, Uday Sanz, Gulshan South Avenue, Gulshan-1, Dhaka1212, Bangladesh. The Bank so far opened 2 (two) branches in 2001, 6 (six) branches in 2002, 2 (two) branches in 2003, 2 (two) branches in 2004, 4 (four) branches in 2005, 5 (Five) Branches in 2006, 5 (Five) Branches in 2007, 7 (Seven) Branches in 2008, 18 (Eighteen) Branches in 2009, 12 (Twelve) Branches in 2010 and 10 Branches in 2011. Total number of branches stood at 79 (Seventy nine). Besides this, the bank is working to expand its business by opening more 11 (eleven) branches in Dhaka and some other important business location of the country in the year 2012 for which we have already taken approval from the Bangladesh Bank.

4.2 Background of SJIBL

Bangladesh is one of the largest Muslim countries in the world. The people of this country are deeply committed to Islamic way of life as enshrined in the Holy Qur’an and the Sunnah. Naturally, it remains a deep cry in their hearts to fashion and design their economic lives in accordance with the precepts of Islam.

The establishment of Shahjalal Islami Bank Limited (SJIBL) on 2001 is the true reflection of this inner urge of its people, which started functioning with effect from 10th May 2001. It commenced its commercial operation in accordance with principle of Islamic Shariah on the 10th May 2001 under the Bank Companies Act, 1991. It is committed to conduct all banking and investment activities on the basis of interest-free profit-loss sharing system. In doing so, it has unveiled a new horizon and ushered in a new silver lining of hope towards materializing a long cherished dream of the people of Bangladesh for doing

Page | 41

their banking transactions in line with what is prescribed by Islam. With the active co-operation and participation of Islamic Development Bank (IDB) and some other Islamic banks, financial institutions, government bodies and eminent personalities of the Middle East and the Gulf countries, Islami Bank Bangladesh Limited has by now earned the unique position of a leading private commercial bank in Bangladesh. Shahjalal Islami Bank Limited” offers the full range of banking services for personal and corporate customers, covering all segments of society within the framework of Banking Company Act and rules and regulations laid down by our central bank. Diversification of products and services include Corporate Banking, Retail Banking and Consumer Banking right from industry to agriculture, real estate to software and is backed by the latest technology.

The Bank is managed by a Team of professional Executives and Officials having profound banking knowledge & expertise in different areas of management and operation of Banks. During the short span of time, Shahjalal Islami Bank so far introduced a good number of attractive deposit products to broaden the resource base and also Investment products to deploy the deposit resources so mobilized. Some more schemes covering the deposits, Investments & Services will be introduced gradually in near future suiting to the taste and requirement of the clients. The Bank has a strong Shariah Council consisting of prominent Ulama, Fuquah & Economists who meet periodically to confer decisions on different Shariah issues relating to Banking Operation & to address them and to give necessary guidance to the management on Shariah Principle. Since inception, Bank has been performing in all the sectors i.e. general Banking, Remittance, Import, Export & Investment. All our branches are fully computerized having on line Banking facility for the clients.

During last nine years SJIBL has diversified its service coverage by opening new branches at different strategically important locations across the country offering various service products both investment & deposit. Islamic Banking, in essence, is not only INTEREST-FREE banking business, it carries deal wise business product thereby generating real income and thus boosting GDP of the economy. Board of Directors enjoys high credential in the business arena of the country, Management Team is strong and supportive equipped with

Page | 42

excellent professional knowledge under leadership of a veteran Banker Mr. Farman R. Chowdhury

4.3 Corporate Profile

Company Profile in BriefName Shahjalal Islami Bank Limited

Chairman                             A.K. Azad

Managing Director                Farman R. Chowdhury

Registered Office2/B, Uday Sanz,, Gulshan South Avenue,

Gulshan-1,Dhaka-1216Auditors                               M/S. Syful Shamsul Alam & Co

Tax Advisor                         M/S K.M Hasan & Co.

Legal Advisor                        Hasan & Associates

Legal Status Public Limited Company.

Nature of BusinessCommercial, Corporate, Investment & Retail Banking

First meeting of the promoters held on 4th September, 2000.

Date of Certificate of Incorporation 1st April, 2001.

Date of Certificate of Commencement of Business

1st April, 2001.

Banking License received on 18th April, 2001.

First Branch License received on 24th April, 2001

Inauguration held on 10th May, 2001.

Authorized Capital Tk.80.00 core.

Paid up Capital Tk.20.50 core.

Number of Branches (as on 20.06.2010) 52

Telephone No. 88-02-9570812, 7160591

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Fax No.           88-02-9570809, 9553562

Website www.shahjalalbank.com.bd

4.4 Vision of SJIBL

To be the unique modern Islamic Bank in Bangladesh and to make significant contribution to the national economy and enhance customers’ trust & wealth, quality investment, employees’ value and rapid growth in shareholders’ equity.

4.5 Mission of SJIBL

To provide quality services to customers. To set high standards of integrity. To make quality investment. To ensure sustainable growth in business To ensure maximization of Shareholders’ wealth. To extend our customers innovative services acquiring state-of-the-art

technology blended with Islamic principles. To ensure human resource development to meet the challenges of the

time.

4.6 Objectives of SJIBL

To conduct interest free banking. To establish participatory banking instead of banking on debtor-creditor

relationship. To invest through different modes permitted under Islamic Shariah. To accept deposits on profit-loss sharing basis. To establish a welfare-oriented banking system. To extend co-operation to the poor, the helpless and the low-income

group for their economic uplift. To pay a vital role in human development and employment generation. To contribute towards balanced growth and development of the country

through investment operations particularly in the less developed area.

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4.7 Principal Activities

The principal activities of the Bank is to provide all kinds of commercial banking products and services to the customers including deposits taking, cash withdrawal, extending investments to corporate organization, retail and small & medium enterprises, trade financing, project finance, working capital finance, lease and hire purchase financing, issuance of Debit Card. Its vision is to be the best private commercial bank in Bangladesh in terms of efficiency, capital adequacy, asset quality, sound management and profitability.

4.8 Strategic plan for future growth

The Banking industry experienced intensification of competitive pressure as the national and international banks operating in Bangladesh strongly pursued the banking and financing needs of the Corporate, Retail, SME sector customers through diversification of products and services and extending automated banking service with ATM, Debit card facilities and Internet Banking. Besides, rates of profit became very competitive for deposit and lending; Customers are demanding higher rate of return against their deposits, on the other hand asking the banks to reduce their lending rates.

Considering the overall scenario, SJIBL continues to focus on its delivery channel, technology, Human Resource and its brands along with branch network, Business promotion, Corporate Social Responsibility and product diversification.

Strategies are means to achieve goals. Aligned with the vision and mission statements of SJIBL, 14 strategies have been identified to address the development and changes we need. It is envisaged that this strategic plan will cascade effectively the vision-mission into concrete action on priority basis and transform SJIBL into a dynamic, effective, and forward looking modern Islamic bank in Bangladesh.

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4.9 Nature of Business

The Bank is carrying out commercial, corporate, investment and retail banking related services to its customers through its twenty-six branches following the provisions of the bank Company Act 1991 as follows:

Corporate Finance. Green Banking. Correspondence Banking. Documentary Credits. Foreign Exchange. Guarantees. Syndicated Finance. Other Related Business.

4.10 Role Of Shahjalal Islami Bank As a commercial Bank for economic sustainability in Bangladesh

4.10.1 Branch Network

The Bank has been operating with a network of 93 branches around the country

Zone Branches

Dhaka 51

Chittagong 22

Rajshahi Zone 08

Khulna 05

Sylhet Zone 05

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Barisal Zone 02

4.10.2 Deposit

Total deposit of Shahjalal Islami Bank Limited stood at Tk. 98,601.32 million

as on 31.12.2014 which was Tk. 96,481.35 million as on 31.12.2013. Deposit is

the ‘life-blood’ of a Bank. Bank puts utmost importance in mobilization of

deposits introducing a few popular and innovative schemes. The bank always

tried to give the highest return on the deposits of the customers. The mobilized

deposits were ploughed back in economic activities through profitable and safe

investments.

4.10.3 Investment

Investment of the Bank stood at Tk. 84,062 million as on 31.12.2014 as against

Tk. 85,707 million as on 31.12.2013 registering a decrease of Tk. 1,645 million,

i.e. 2% negative growth. The Bank was very conscious & careful in deployment

of investing fund. The Bank always entertains quality investment proposal

shaving sound creditworthiness and good track record of customers. The Bank

has also introduced some Investment Schemes to provide financial assistance to

comparatively less advantaged group of people.

4.10.4 Foreign Exchange Business

Total Foreign Exchange Business handled during the year 2014 was Tk.

163,674 million as against Tk. 169,318 million of 2013, registering a decrease

of Tk. 5,644 million, i.e. 3.33% negative growth. The brief particulars of

Foreign Exchange Business are given below:

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  2014 2013 2014 2013 2014 2013

Import 83731 81926 2.20%26.75% 51.16% 48.39%

Export 76734 84809-9.52%

23.45% 46.88% 50.09%

Foreign Remittance 3209 2583

24.24%

11.75% 1.96% 1.53%

Total 163674169318

-3.33%

24.93%

100.00%

100.00%

4.10.5 Contribution to National Exchequer

The Bank has made provision of Tk. 28.78 million for corporate tax in 2014

against 1,077.86 million in 2013. The bank has also contributed to the economy

by generating employment of 2,145 full time officials. In the year 2014, Bank

has paid Tk. 2,193 million to Government exchequer as source tax, salary tax,

VAT, excise duty and other tax & VAT realized against various services. In the

intermediation process, the Bank mobilized resources of Tk. 98,601.32 million

from the surplus economic unit and deployed Tk. 84,062.27 million in 2014.

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SOWT Analysis

A SWOT analysis is a modern analytical tool that can help analyze a business to examine the interaction between the particular characteristics of your business and the external marketplace in which you compete. The internal portion of a SWOT analysis looks at the individual strengths and weaknesses of SJIBL. Similarly, the external analysis looks at the opportunities presented by the marketplace and the threats that SJIBL face in market.

5.1 Strength

Full-functioning computerized accounts maintenance. SWIFT is being used for foreign trade related operations like letter of

credit, fund transfer, guarantee, etc with optimum security. Easy and prompt cash transaction by introducing Money counting

machine SJIBL provide ATM debit card and nonstop banking facilities.

5. 2 Weakness

Excessive reliance on fixed deposits. Very Limited number of branch network Some officials dealing with retail products have not been as a

professional as a private bank does require. Charges of statement or certificates are very high. High ATM transaction cost

5. 3 Opportunity

It has real time online banking. New Product Innovation

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Technical support to Small Industries to help them to run their business successfully.

Credit card in dual currency Establishment of new branches to enlarge the market provide full range of commercial banking services

5.4 Threats

Increasing market competitors day by day Restless political condition in Bangladesh Market pressure for narrow down spread Unexpected fluctuation of currency market

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6.1 Major Problems of Commercial Banks for Economic Sustainability in Bangladesh

It appears from the findings of the analysis that the involvement of commercial

banks for economic sustainability has not been unto the desired level. The

reasons behind such low profile may be explained below:

1. NCBs’ inefficient credit allocation and low recovery performance in

development financing rendered the impression in the banking sector that

such financing is unviable. The fact remains that NCBs in majority cases

acted on govt. directives in lending to thrust and priority sectors, much

less on the basis of viability of the projects and the entrepreneurs.

2. NCBs deployed the short-term maturity funds to long term uses while

extending term finance to the projects. This mismatch of maturities

created liquidity problem.

3. The presence of BCBs and FCBs in rural areas is low and virtually nil

respectively. As a result, financing rural development by them could not

be effected.

4. Since the target group of development financing mostly lack capability to

provide collateral, insisting upon collateral by the NCBs had resulted in

the credit going to the inappropriate hands. On the other hand, collateral-

free credit to some portion of the target group was also not handled

properly and increased the risk of recovery for the banks in case of

genuine/wilful default.Sometimes, the Govt. showed upper hand in

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politicizing the credit both in loan disbursement and waiver, though it had

no stake in the loanable funds.

5. Commercial banks attach importance to the strategy for short run profit

making rather than long- run development outlook.

6. Bank owners and employees do not hold positive attitude towards

development financing on the plea that the same is the responsibility of

the Government.

7. Central Bank’s moral suasion policy for increasing involvement of

commercial banks in development financing did not work well.

8. Govt’s support and extension facilities in the form of provision of data

base, investment counseling, appropriate technology, infrastructure,

marketing of products, etc. appear to be inadequate.

9. Dearth of good/viable entrepreneurs is also responsible for not turning the

bank-financed development activities/projects a success.

10.Huge amount of classified loan on the part of both NCBs and BCBs have

restricted their lending to only selective viable areas.

11.Cost of operation for development financing is relatively high pushing up

the lending rates which sometimes turns the bank-financed projects

unviable.

12.Development financing projects are by and large prone to natural hazards

and also to small extent exposed to marketing hazards.

13.Legal support for recovery is still weak despite the introduction of a

number of legal reforms.

14.Commercial banks’ credit allocation is not based on systematic analysis

of potential economic activities.

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6.2 Recommendations

NCBs having a large network of branches have opened up their financing

windows to almost all areas of development activities. Though directed credit

has been discontinued, they are under indirect pressure to channel loanable

funds to different sectors and predevelopment activities. Development financing

activities are not, by nature, necessarily unviable. The banks being the vital

organ of the economy should be imbued with the spirit of patriotism to finance

the developmental activities in the interest of the country as well as their

survival. But one has to establish the viability of those activities undertaking

realistic analysis before releasing the funds for the purpose. The NCBs should

not make the same mistakes as were committed in the past for extending

directed credit. They should reckon with the three things in enhancing the

quality of lending/investment –

(i) Developing adequate professionals,

(ii) Uncompromising attitude with the viability of the projects and

entrepreneurs and monitoring system and

(iii) Avoidance of gross mismatch between the maturities of

deposits and loans.

Directed credit itself is not an unwelcome proposition at the initial stage of

development of an economy. Directed credit made an important contribution to

the successful industrialization of some East-Asian countries, particularly of

South Korea, during the 1960s and 1970s. In such a situation, provision of

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support (and protection) to industries was strictly conditional upon good

performance. It is regrettable that in our country directed credit was backed by

political motivation and inefficiency in credit allocation.

In a competitive market, NCBs should be given more operational autonomy to

carry out lending and management independently and professionally. Autonomy

is essentially the freedom

I. To hire and compensate professionals based on market

conditions,

II. to undertake expenditures based on objectives for financial

performance and more important,

III. To make loans based on an evaluation of risk and efficiency.

The Board of Directors should be manned with the

professionals having high order of integrity. Members of the

political parties should be barred from the membership in the

boards of the banks. In order to restore financial discipline,

trade unions should not be backed by political parties.

In the same breadth, the issues of a low profile of the BCBs and almost no

response of the FCBs to development financing have to be critically reviewed.

It is true that in the market mechanism, the choice of the loan portfolio of the

banks is left to their discretion.

Nevertheless, the BCBs and FCBs can not withdraw from development

financing on the plea that this is not their domain. If the development

sectors/activities are found potentially viable, they should not shy away, rather

seek way outs for channeling funds benefiting the economy as well as

themselves.

While development financing has to be a part of the loan-portfolio of all banks

regardless of the ownership, politicization of credit in loan disbursement and

recovery should not prevail in any form. There might be occasions when some

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sector/ economic activity has to be financed at concessional interest rates (as is

now the case with the export sector), but in such cases, the extent of subsidy

(the difference between the shadow lending rates and the administered interest

rates) should be borne by the Government through provision of budgetary

allocation. The same policy may also be followed for any waiver of loan (as

warranted by the natural calamities) enforced at the instance of the Government.

It should, however, be noted that as the commercial banks are free to set up

lending rates, they should not favour a higher lending rate (beyond the repaying

capacity of the borrowers) burdened by high risk premium being guided by the

risk aversion attitude. The loan pricing policies followed by the NCBs seem to

be driven by their compulsion to recoup the past losses. With a view to

maintaining the quality of future lending, loan pricing should be immune from

any past hangover. In case of private banks, the cost of borrowings vary from

one borrower to another in the same lending category not depending upon risk

perceptions but based on the intimate relationship prevailing with the closely

held borrowers. This undesirable discrimination should be done away with for

upholding healthy and competitive banking system.

Contrary to the norms of development financing, the commercial banks are

found to have been placing the deposits of small account holders, rural and

underdeveloped areas to the large loan borrowers, urban and developed areas as

loans respectively in a grossly disproportionate manner. The incidence of such

cases is highly common in case of private sector banks. Even admitting the fact

that money should go to the person/area who/which can make the best use of it,

there should be minimum equitable distribution of wealth through deployment

of loanable funds. Development financing and collateralised credit should not

mandatorily co-exist in all cases if the credit has to reach the target sectors/

activities and target beneficiaries. Collateral free micro credit in rural areas and

consumer credit in urban areas performed much better as compared to the

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sluggish performance by the collateralised credits. The factors contributing to

this scenario are group guarantee and supervision in case of micro credit and

clients’ income generation capacity in case of consumer credit. However, the

share of micro credit in the total outstanding advances of all banks stand at only

1.4 per cent as on 31-12-1998 which is too small a stake of the banking sector in

alleviating poverty. Now the major development challenge for our economy has

been to extend credit/venture capital to agriculture, agro based sub-sectors,

small and medium enterprises introducing innovative projects (e.g. software,

electronics), new technology, etc. Collaterals should be done away with in

financing such sectors and activities upto a certain limit, say, Tk. 5 million.

Entrepreneurs’ technical knowledge and integrity, project viability and adequate

supervision and monitoring should be emphasized in lending decision instead of

reliance on collateral. The government may actively consider forming a Venture

Capital Company in order to facilitate easy access to capital for launching new

ventures/ ventures introducing new technology by the prospective

entrepreneurs.

The conventional view of economic sustainability focuses mainly on rural

lending and small sector financing. NCBs are already operating in the field,

though they would have to revamp their operations by streamlining the credit

allocation policy and strengthening the supervision and monitoring system.

However, BCBs and FCBs should not lag behind in the same soil of banking in

this regard. Gradually, they should expand the semi-urban and rural branch

network following the process of consolidation. In the absence of such

arrangement, they might establish linkage program with the NGOs, enter into

wholesale banking with PKSF or similar institution for loaning out funds to

them for onward retail lending to the rural areas and small scale projects or may

open subsidiaries, if found feasible. NCBs also may follow the above

arrangements on the basis of working out of the cost-effectiveness of the

development financing programs through using their own outlets. A sizeable

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amount of loanable funds has to be channeled for development financing in the

form of term finance. As the commercial banks’ deposit maturities are relatively

short in nature, they find it difficult to lend long to the projects by borrowing

short. Although, currently there is no mandatory limit on term loan financing by

the commercial banks, financial prudence suggests that the exposure on this

account should not exceed 20% of the loanable funds. In a bid to increase the

flow of term loan by the banks as demanded by the industrial and agro-based

sectors, floatation of industrial development bond may be resorted to as has

been done by Agrani Bank. The financial health of the banks, particularly, the

NCBs have deteriorated in terms of capital adequacy, loan classification and

provisioning requirement over time while BCBs have registered relatively better

performance in all the areas. However, BCBs also have huge provisioning

shortfall. FCBs have demonstrated superiority in terms of all the indicators

under study. The BRC in its final report has mentioned that the net worth of

four NCBs became negative as instead of operating purely on business grounds

they acted as the main source of loans for the Govt.’s thrust and priority sectors.

While agreeing partially with the above contention, it can be said that thrust or

priority sectors by themselves are not unviable for the purpose of financing. It is

politicization of credit, inefficient credit allocation, high emphasis on

disbursement and much less on recovery, absence of professionalism, poor

monitoring, etc. which have made such financing unviable. The NCBs could

also professionally deal with financing of such sectors on the basis of viability

of the projects.

According to the report, the conditions of the BCBs were also fragile. Many

irregularities occurred in the absence of transparency, accountability and good

governance and as a result, seven banks were identified as problem banks. The

BRC report observed that the assets of the NCBs had deteriorated creating an

adverse impact on their earnings. It has now become impossible to make profits

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due to huge provisioning requirement against classified loans and interest

expense.

Despite this improvement, their earning powers are not comparable to the

international standard or those of the foreign banks operating in Bangladesh.

With a view to checking further deterioration of the financial health of the

banks, it is urgent that the banks, particularly the NCBs, should provide serious

attention to the improvement of the quality of lending. In this context, the

successful involvement of commercial banks in development financing largely

depends on the establishment of sound structure of prudential regulation and

supervision by the central bank. This entails overhauling of accounting,

auditing, and information disclosure rules and bringing these items in line with

current financial technology. The focus of bank supervision should shift from

the implementation of Govt. directives such as credit allocation, to the quality of

loan portfolio, adequacy of capital, and the soundness of bank management.

In the competitive banking environment the need for product diversification can

hardly be overemphasized in view of the assumption of the functions of

economic sustainability as the modern view suggests. Planned diversification,

both in relation to sources and uses of funds, would help improve the liquidity

position of the banks and accessing to the funds of compatible maturities for

term lending on the one hand, and find out the various potentially viable uses of

funds on the other. The products which may be tipped for launching by the

commercial banks include Asset Securitization, Merchant Banking, Lease

Financing, Factoring, etc. The recent changes in the global financial arena

necessitates the introduction of electronic devices used in international banking

operations e.g. E-commerce which represents paperless method of undertaking

commercial transactions over the computer network. E-commerce has vast

potentiality and will revolutionize the economy and trade.

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The commercial banks should not confine their activities in the money market,

rather they should seek opportunities for establishing linkage with the capital

market. Floatation of securities against the package of good loans and

increasing participation in merchant banking/investment banking activities like

underwriting, portfolio management, issue management, venture capital

financing, etc. would definitely broaden the horizon of the development

functions of commercial banks and lessen the incidence of liquidity and default

risk. Commercial banks of both developed and developing countries have also

expanded their activities by including investment banking functions. In

Bangladesh perspective, the flourishing of investment banking activities would

depend on the healthy growth of the capital market which prevails now at an all-

time low confidence index because of the very poor response of the investors.

Lease financing has already been recognized as a popular alternative mode of

investment financing. In addition to leasing companies, some local private

banks have meanwhile been involved in extending lease financing facilities to

different corporate clients and their experiences have so far been good in terms

of realization of dues as compared to the conventional cash mode of financing.

The commercial banks should also extend lease financing facilities to the small

industries and agro-based sectors.

The banks must conduct risk assessment of the projects in a professional

manner. They can reduce risk substantially in project financing through loan

syndication arrangements.

Having said so, it has to be seen that the Govt. creates objective conditions for

banks’ positive attitude and increasing participation in economic sustainability

to serve their own interest. Development of entrepreneurship, data bank,

infrastructural facilities, extension services, etc. have to be undertaken in a

planned way by the Govt. and private sector representatives like chambers of

commerce and industry to facilitate the banks for financing.

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Though, in the deregulated banking environment there should be no scope for

intervention in the credit portfolio of the banks, the moral suasion policy of the

Bangladesh Bank can be activated from time to time in order to monitor the

participation of the various commercial banks (even of the FCBs) in economic

sustainability in cases where it is deemed necessary. The scope of Credit

Guarantee Fund as instituted by the Bangladesh Bank should be enlarged for

financing the small and medium enterprises (SMEs) and the procedures of

having access thereto should be made easier for increasing use of this facility. In

the sphere of agricultural financing, the introduction of Crop Insurance Scheme

should be actively considered. In our economy, floods and other natural

calamities are almost regular visitors. Having considered such phenomena, the

Bangladesh Bank may consider instituting a Disaster Management Fund for

facilitating the uninterrupted credit flow to the pro-development sectors prone to

natural hazards.

As stated earlier, the commercial banks should in no way compromise with the

quality of lending even if those are channeled to the development

sectors/activities including public sector financing. Henceforth, the newly

created loans of the banks should not succumb to classification exceeding 10

per cent of the exposure. Restoring the financial stability of the banks is deemed

to be very important at this critical juncture for pursuing sound banking

including the management of the portfolio of development financing. This will

warrant expeditious handling of the non-performing loans lying with the

portfolio of the banks. The banks should undertake a detailed scrutiny of their

respective problem loans in order to figure out which could be made performing

and which has to be off-loaded from the bank’s portfolio. For the second course

of action, enforcement of the laws related to recovery, expeditious settlement of

cases and writing-off some bad loans remain as the only viable way outs for

helping the banks to clean up their portfolios. However, the pursuit of efficient

credit delivery system and intensive monitoring by the banks with the help of

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adequately trained professionals should top the agenda for future development

outlook. In the modern competitive banking, it is obvious that the focus of

commercial bank lending would be on profit. Naturally, whatever activities they

lend to, if turned as viable for financing ensuring the recovery of the loan, these

would no doubt be considered as development financing.

However, they should increasingly involve themselves in conventional

economic sustainability in order to gain long term viability benefiting

themselves as well as the economy, but that should not occur at the cost of

viability.

6.3 Conclusion

It can be concluded that, Commercial banks of Bangladesh is doing a

tremendous job. They are the pioneer for helping many economic sectors to

grow in Bangladesh. Without their contribution, Bangladesh would never be the

like today. They are continuously helping many industries to start, expanding

more and thus helping the overall development for economic sustainability in

Bangladesh.

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References

Books: Brigham, E. F., & Houston, J. F. (2011), Fundamentals of Financial

Management, 10th Edition, Ohio, USA: Thomson South Western. Kothari, C.R. (2006), “Research Methodology, Methods and

Techniques”, New Age International (P) Ltd., 2nd Edition. Nwankwo G.O. (2001), Bank Management Principles and Practice, UK:

Malthouse Press Limited Pandey, I. M. (1979), Financial Management, Vikas Publishing House

Pvt. Ltd, New Delhi, pp.109-116. Web Sites:

Al Amin (2013), “Advance working report on foreign exchange operation of EXIM Bank Ltd.”, available at http://www.sb.iub.edu.bd/internship/Spring2013/0920049.pdf

King, P., (2008), ‘Crunch time for business’, Credit Management, Available from <URL:http://www.icm.org.uk/pdfbin/cm.pdf>

http://www.investorwords.com/3665/performance.html#ixzz36rINH2mD http://www.businessdictionary.com/definition/

performance.html#ixzz36rJv41Df www. Investopedia.com www.wikipedia.org www.shahjalalislamibank-bd.com

Others: Annual report of Shahjalal Islami Bank Limited (2009-2014). Credit Manual of JBL. Foreign Exchange Manual of SIBL-2013. Humphrey, Albert (2005), "SWOT Analysis for Management Consulting",

SRI Alumni Newsletter (SRI International). Rashid, M. (2010), “Banking Sector Challenges in Bangladesh”, The

Daily Star.

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