While private banks have made efforts to adopt banking practices similar to those in more developed countries, these initiatives are often hindered by policies implemented by Bangladesh Bank, the country’s central bank. These policies, at times, are seen as politically influenced or ineffective, contributing to a banking environment where corruption, money laundering, and illegal financial activities can occur.
History
Before independence
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The first modern bank in Bengal was Bank of Hindustan, established in 1770 in Calcutta. It was an offshoot of trading company Messrs. Alexander and Co. and operated until 1832 when the trading company failed. The circulation of its notes was limited to Calcutta and its immediate environs.[1]
The Bank of Calcutta, established in 1806, is the oldest still in existence in some form. It was renamed Bank of Bengal in 1809, was merged into the Imperial Bank of India in 1921, and became the State Bank of India in 1955.[4][5]
Following the partition, branches of the registered banks started shifting to India or close down their operations in East Bengal. Resulting only 69 branches were left all over the East Pakistan in 1951.
In 1959, Eastern Mercantile Bank Limited was established and had 106 before independence. Consequently, in 1965 Eastern Banking Corporation was established and soon reached 60 just before the liberation war. These two banks were established with the initiation of some renowned Bengali businessmen for providing credit to the local entrepreneurs who had limited access to the credit in those days from other financial institutions of West Pakistan.
After independence
The banking system at independence (1971) consisted of two branch offices of the former State Bank of Pakistan and seventeen large commercial banks, two of which were controlled by Bangladeshi interests and three by foreigners other than West Pakistanis.[9] There were fourteen smaller commercial banks.[9]
Virtually all banking services were concentrated in urban areas.[9] The newly independent government immediately designated the Dhaka branch of the State Bank of Pakistan as the central bank and renamed it the Bangladesh Bank.[9] The bank was responsible for regulating currency, controlling credit and monetary policy, and administering exchange control and the official foreign exchange reserves.[9] The Bangladesh government initially nationalised the entire domestic banking system and proceeded to reorganise and rename the various banks.[9] Foreign-owned banks were permitted to continue doing business in Bangladesh.[9] The insurance business was also nationalised and became a source of potential investment funds.[9] Cooperative credit systems and postal savings offices handled service to small individual and rural accounts.[9] The new banking system succeeded in establishing reasonably efficient procedures for managing credit and foreign exchange.[9] The primary function of the credit system throughout the 1970s was to finance trade and the public sector, which together absorbed 75 per cent of total advances.[9]
After the liberation of Bangladesh, the twelve Banking companies who were doing business in Bangladesh, were nationalized by the Government of the People's Republic of Bangladesh.
The government's encouragement during the late 1970s and early 1980s of agricultural development and private industry brought changes in lending strategies.[9] Managed by the Bangladesh Krishi Bank, a specialised agricultural banking institution, lending to farmers and fishermen dramatically expanded.[9] The number of rural bank branches doubled between 1977 and 1985, to more than 3,330.[9] Denationalisation and private industrial growth led the Bangladesh Bank and the World Bank to focus their lending on the emerging private manufacturing sector.[9] Scheduled bank advances to private agriculture, as a percentage of sectoral GDP, rose from 2 per cent in FY 1979 to 11 per cent in FY 1987, while advances to private manufacturing rose from 13 to 53 per cent.[9]
The transformation of finance priorities brought with it problems in administration.[9] No sound project-appraisal system was in place to identify viable borrowers and projects.[9] Lending institutions did not have adequate autonomy to choose borrowers and projects and were often instructed by the political authorities.[9] In addition, the incentive system for the banks stressed disbursements rather than recoveries, and the accounting and debt collection systems were inadequate to deal with the problems of loan recovery.[9] It became more common for borrowers to default on loans than to repay them; the lending system was simply disbursing grant assistance to private individuals who qualified for loans more for political than for economic reasons.[9] The rate of recovery on agricultural loans was only 27 per cent in FY 1986, and the rate on industrial loans was even worse.[9] As a result of this poor showing, major donors applied pressure to induce the government and banks to take firmer action to strengthen internal bank management and credit discipline.[9] As a consequence, recovery rates began to improve in 1987.[9] The National Commission on Money, Credit, and Banking recommended broad structural changes in Bangladesh's system of financial intermediation early in 1987, many of which were built into a three-year compensatory financing facility signed by Bangladesh with the IMF in February 1987.[9]
One major exception to the management problems of Bangladeshi banks was the Grameen Bank, begun as a government project in 1976 and established in 1983 as an independent bank.[9] In the late 1980s, the bank continued to provide financial resources to the poor on reasonable terms and to generate productive self-employment without external assistance.[9] Its customers were landless persons who took small loans for all types of economic activities, including housing.[9] About 70 per cent of the borrowers were women, who were otherwise not much represented in institutional finance.[9] Collective rural enterprises also could borrow from the Grameen Bank for investments in tube wells, rice and oil mills, and power looms and for leasing land for joint cultivation.[9] The average loan by the Grameen Bank in the mid-1980s was around Tk2,000 (US$25), and the maximum was just Tk18,000 (for construction of a tin-roof house).[9] Repayment terms were 4 per cent for rural housing and 8.5 per cent for normal lending operations.[9]
The Grameen Bank extended collateral-free loans to 200,000 landless people in its first 10 years.[9] Most of its customers had never dealt with formal lending institutions before.[9] The most remarkable accomplishment was the phenomenal recovery rate; amid the prevailing pattern of bad debts throughout the Bangladeshi banking system, only 4 per cent of Grameen Bank loans were overdue.[9] The bank had from the outset applied a specialised system of intensive credit supervision that set it apart from others. Its success, though still on a rather small scale, provided hope that it could continue to grow and that it could be replicated or adapted to other development-related priorities.[9] The Grameen Bank was expanding rapidly, planning to have 500 branches throughout the country by the late 1980s.[9]
Beginning in late 1985, the government pursued a tight monetary policy aimed at limiting the growth of domestic private credit and government borrowing from the banking system.[9] The policy was largely successful in reducing the growth of the money supply and total domestic credit.[9] Net credit to the government actually declined in FY 1986.[9] The problem of credit recovery remained a threat to monetary stability, responsible for serious resource misallocation and harsh inequities.[9] Although the government had begun effective measures to improve financial discipline, the draconian contraction of credit availability contained the risk of inadvertently discouraging new economic activity.[9]
Foreign exchange reserves at the end of FY 1986 were US$476 million, equivalent to slightly more than two months worth of imports.[9] This represented a 20-per cent increase of reserves over the previous year, largely the result of higher remittances by Bangladeshi workers abroad.[9] The country also reduced imports by about 10 per cent to US$2.4 billion.[9] Because of Bangladesh's status as a least developed country receiving concessional loans, private creditors accounted for only about 6 per cent of outstanding public debt.[9] The external public debt was US$6.4 billion, and annual debt service payments were US$467 million at the end of FY 1986.[9]
The reform program continued in subsequent years. Bangladesh bank administered the World Bank's Financial Institutions Development Project from 2000 to 2006, which, according to Asian Development Bank, enabled "substantial progress towards sustainable financing of private sector initiatives to accelerate industrial growth in the country".[10]
"Three lessons stand out from Bangladesh's development experience and can inspire other countries: empowering women and girls, investing in people and connectivity, and moving decisively on climate adaptation and resilience," said the World Bank President.[11]
Islamic banking in Bangladesh
Bangladesh has eight Islamic banks, while several non-Islamic banks offer Islamic-banking services alongside their normal operations.[12] As of 2017, Islamic banking, led by Islami Bank Bangladesh Ltd, controls 20% of deposits in Bangladesh.[12] Bangladesh operates the world's biggest Islamic microfinance scheme.[12] According to Bangladeshi government polling, Islamic banking has an overall approval rating of 84% among the country's population.[12]
Offshore Banking Operation (OBO) was first introduced by Bangladesh Bank in 1985 through a circular for allowing active foreign financing at Export Processing Zones (EPZs). Banks operated the services with Bangladesh Bank approval without any separate law for an offshore banking system until the enactment of the Offshore Banking Act, 2024. Enactment of a separate law allowed banks to promote fixed deposit products where banks used to primarily use offshore banking operations by taking foreign loans and lending to local entities.[13]
Offshore Banking Act, 2024
The law allows the offshore banking operations to be executed with US Dollar, Pound, Euro, Yen, and the Yuan.
No income tax or charges can be imposed on the interest or profit earned by the Offshore Banking Units, and no fees or levies can be imposed on the accounts of depositors or foreign lenders.
The OBUs can take deposits from fully foreign-owned companies in Export Processing Zones (EPZs), Economic Zones, and Hi-tech parks.
The OBUs can provide short-term loans, open letters of credit, provide guarantees, bill discounting, bill negotiating, and other outsourcing services related to international trade. In case of resident Bangladeshis, OBUs can provide deferred export bill discounting on imports and exports. Upon approval from Bangladesh Bank, OBUs can provide medium and long-term loans to local industrial enterprises.[14]
Offshore accounts can be opened on behalf of their relatives or friends residing abroad.[15]
Bill pay services provided by mobile phone operators
Microcredit is the extension of very small loans (microloans) to impoverished borrowers who typically lack collateral, steady employment, and a verifiable credit history. It is designed to support entrepreneurship and alleviate poverty. Many recipients are illiterate, and therefore unable to complete paperwork required to get conventional loans. As of 2009 an estimated 74 million people held microloans that totaled nearly US$40 billion. Grameen Bank reports that repayment success rates are between 95 and 98 percent. The first economist who had invented the idea of microloans was Jonathan Swift in the 1720s. Microcredit is part of microfinance, which provides a wider range of financial services, especially savings accounts, to the poor. Modern microcredit is generally considered to have originated with the Grameen Bank founded in Bangladesh in 1983 by their current Chief Adviser Muhammad Yunus. Many traditional banks subsequently introduced microcredit despite initial misgivings. The United Nations declared 2005 the International Year of Microcredit. As of 2012, microcredit is widely used in developing countries and is presented as having "enormous potential as a tool for poverty alleviation."
Microfinance consists of financial services targeting individuals and small businesses (SMEs) who lack access to conventional banking and related services.
Grameen Bank is a microfinance, specialized community development bank founded in Bangladesh. It provides small loans to the impoverished without requiring collateral.
Bangladesh Bank is the central bank of Bangladesh and is a member of the Asian Clearing Union. It is fully owned by the Government of Bangladesh.
Modern banking in India originated in the mid of 18th century. Among the first banks were the Bank of Hindustan, which was established in 1770 and liquidated in 1829–32; and the General Bank of India, established in 1786 but failed in 1791.
The International Finance Investment and Commerce Bank PLC. commonly known as IFIC Bank is a first generation Bangladeshi private commercial bank. IFIC Bank PLC is a banking company incorporated in the People's Republic of Bangladesh with limited liability. It was set up at the instance of the Government in 1976 as a joint venture between the Government of Bangladesh and Sponsors in the private sector with the objective of working as a finance company within the country and setting up joint venture banks/financial institutions aboard. In 1983 when the Government allowed banks in the private sector, IFIC was converted into a full-fledged commercial bank. The Government of the People's Republic of Bangladesh holds 32.75% of the share capital of the Bank and the rest is held by Institutions both Local & Foreign and General Shareholders. The Government is being represented by two nominated Directors on the Board of the Bank. Among them, the current Board of Directors are formed by Bangladesh Bank with four Independent Directors came from different sectors with vast knowledge and experience.
The Association for Social Advancement is a non-governmental organisation based in Bangladesh which provides microcredit financing.
The Bank of Mongolia, or Mongolbank, is the central bank of Mongolia. The main objective of the Bank of Mongolia is to ensure stability of the Mongolian tögrög. Within its main objective the Bank of Mongolia promotes balanced and sustained development of the national economy, through maintaining the stability of money, financial markets and the banking system.
China's banking sector had CN¥417 trillion in assets at the end of 2023. The "Big Four" state-owned commercial banks are the Bank of China, the China Construction Bank, the Industrial and Commercial Bank of China, and the Agricultural Bank of China, all of which are among the largest banks in the world as of 2018. Other notable big and also the largest banks in the world are China Merchants Bank and Ping An Bank.
Solidarity lending is a lending practice where small groups borrow collectively and group members encourage one another to repay. It is an important building block of microfinance.
A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans, mobilising saver surplus to deficit spenders. Lending activities can be directly performed by the bank or indirectly through capital markets.
Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 of India, engaged in the business of loans and advances, acquisition of shares, stock, bonds, hire-purchase insurance business or chit-fund business, but does not include any institution whose principal business is that of agriculture, industrial activity, purchase or sale of any goods or providing any services and sale/purchase/construction of immovable property.
Grameen America is a 501(c)(3) nonprofit microfinance organization based in New York City. It was founded by Nobel Peace Prize recipient Muhammad Yunus in 2008. Grameen America is run by former Avon Chairman and CEO Andrea Jung. The organization provides loans, savings programs, financial education, and credit establishment to women who live in poverty in the United States. All loans must be used to build small businesses.
Bangladesh Development Bank PLC. is a state-owned commercial bank in Bangladesh. As a Public Limited Company, BDBL formally embarked on its journey on January 03, 2010. It extends financial assistance for setting up industries and provides all kinds of commercial banking services to its customers through its branch network in Bangladesh.
Islami Bank PLC., abbreviated as IBBPLC, more commonly known as Islami Bank, is an Islamic banking company based in Bangladesh. It became incorporated on 13 March 1983 as a public limited company under the Companies Act 1913, and started operation on 30 March, the same year. IBBPLC maintains its own ATM Booths with a country-wide shared ATM network. IBBPLC has been the largest private banking network in Bangladesh. The bank has been listed with both Dhaka Stock Exchange Ltd. and Chittagong Stock Exchange Ltd.
The impact of microcredit is the study of microcredit and its impact on poverty reduction which is a subject of much controversy. Proponents state that it reduces poverty through higher employment and higher incomes. This is expected to lead to improved nutrition and improved education of the borrowers' children. Some argue that microcredit empowers women. In the US and Canada, it is argued that microcredit helps recipients to graduate from welfare programs. Critics say that microcredit has not increased incomes, but has driven poor households into a debt trap, in some cases even leading to suicide. They add that the money from loans is often used for durable consumer goods or consumption instead of being used for productive investments, that it fails to empower women, and that it has not improved health or education.
Small finance banks (SFB) are a type of niche banks in India. Banks with a SFB license can provide basic banking service of acceptance of deposits and lending. The aim behind these is to provide financial inclusion to sections of the economy not being served by other banks, such as small business units, small and marginal farmers, micro and small industries and unorganised sector entities.
City Bank PLC is a Bangladeshi private commercial bank headquartered in Dhaka. The bank provides products and services in retail banking, corporate finance, SME Banking, women banking, digital banking, asset management, equity brokerage, and security. It has 133 branches. The bank is a licensee to issue Visa and MasterCard Debit and Credit Cards and it is the sole licensee of American Express Cards in Bangladesh.
Meghna Bank PLC. is a fourth-generation bank headquartered in Gulshan, Dhaka, Bangladesh. Established on May 9, 2013, by entrepreneur and politician H. N. Ashequr Rahman, the bank has been in operation for a decade.
The Government Savings Bank (1833) was an Indian bank founded in 1833 in British India and operated until it was liquidated in 1843. The bank was the fifteenth oldest bank in India.
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