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Bangladesh is a developing country with an impoverished banking system, particularly in terms of the services and customer care provided by the government run banks. In recent times, private banks are trying to imitate the banking structure of the more developed countries, but this attempt is often foiled by inexpert or politically motivated government policies executed by the central bank of Bangladesh, Bangladesh Bank. The outcome is a banking system fostering corruption and illegal monetary activities/laundering etc. by the politically powerful and criminals, while at the same time making the attainment of services or the performance of international transactions difficult for the ordinary citizens, students studying abroad or through distance learning, general customers etc.
This section needs expansionwith: banking between the 1860s and 1971. You can help by adding to it. (February 2016)
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]
Microcredit is the extension of very small loans (microloans) to impoverished borrowers who typically lack collateral, steady employment, or 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 US$38 billion. Grameen Bank reports that repayment success rates are between 95 and 98 percent.
Microfinance is a category of financial services targeting individuals and small businesses who lack access to conventional banking and related services. Microfinance includes microcredit, the provision of small loans to poor clients; savings and checking accounts; microinsurance; and payment systems, among other services. Microfinance services are designed to reach excluded customers, usually poorer population segments, possibly socially marginalized, or geographically more isolated, and to help them become self-sufficient. ID Ghana is an example of a microfinance institution.
The Reserve Bank of India, abbreviated as RBI, is India's central bank and regulatory body responsible for regulation of the Indian banking system. Owned by the Ministry of Finance, Government of India, it is responsible for the control, issue and maintaining supply of the Indian rupee. It also manages the country's main payment systems and works to promote its economic development. Bharatiya Reserve Bank Note Mudran (BRBNM) is a specialised division of RBI through which it prints and mints Indian currency notes (INR) in two of its currency printing presses located in Mysore and Salboni. The RBI, along with the Indian Banks' Association, established the National Payments Corporation of India to promote and regulate the payment and settlement systems in India. Deposit Insurance and Credit Guarantee Corporation was established by RBI as one of its specialized division for the purpose of providing insurance of deposits and guaranteeing of credit facilities to all Indian banks.
Grameen Bank is a microfinance specialized community development bank founded in Bangladesh. It makes small loans to the impoverished without requiring collateral.
Muhammad Yunus is a Bangladeshi social entrepreneur, banker, economist and civil society leader who was awarded the Nobel Peace Prize in 2006 for founding the Grameen Bank and pioneering the concepts of microcredit and microfinance. These loans are given to entrepreneurs that are too poor to qualify for traditional bank loans. Yunus and the Grameen Bank were jointly awarded the Nobel Peace Prize "for their efforts through microcredit to create economic and social development from below". The Norwegian Nobel Committee said that "lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty" and that "across cultures and civilizations, Yunus and Grameen Bank have shown that even the poorest of the poor can work to bring about their own development". Yunus has received several other national and international honours. He received the United States Presidential Medal of Freedom in 2009 and the Congressional Gold Medal in 2010.
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.
Cooperative banking is retail and commercial banking organized on a cooperative basis. Cooperative banking institutions take deposits and lend money in most parts of the world.
The Association for Social Advancement is a non-governmental organisation based in Bangladesh which provides microcredit financing.
Banker to the Poor: Micro-Lending and the Battle Against World Poverty is an autobiography of 2006 Nobel Peace Prize Winner and Grameen Bank founder Muhammad Yunus. The book describes Yunus' early life, moving into his college years, and into his years as a professor at Chittagong University. While a professor at Chittagong University, Yunus began to take notice of the extreme poverty of the villagers around him. In 1976, Yunus incorporated the help of Maimuna Begum to collect data of people in Jobra who were living in poverty. Most of these impoverished people would take a loan from moneylenders to buy some raw material, using that raw material to create some product, and then selling back the good to the moneylender to repay the loan, earning a very meager profit. One woman interviewed made no more than two cents per day creating bamboo stools using this system. The list Begum brought back to Yunus named 42 women who were living on credit of 856 taka.
A mortgage loan or simply mortgage, in civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any purpose while putting a lien on the property being mortgaged. The loan is "secured" on the borrower's property through a process known as mortgage origination. This means that a legal mechanism is put into place which allows the lender to take possession and sell the secured property to pay off the loan in the event the borrower defaults on the loan or otherwise fails to abide by its terms. The word mortgage is derived from a Law French term used in Britain in the Middle Ages meaning "death pledge" and refers to the pledge ending (dying) when either the obligation is fulfilled or the property is taken through foreclosure. A mortgage can also be described as "a borrower giving consideration in the form of a collateral for a benefit (loan)".
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. 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.
External commercial borrowing (ECBs) are loans in India made by non-resident lenders in foreign currency to Indian borrowers. They are used widely in India to facilitate access to foreign money by Indian corporations and PSUs. ECBs include commercial bank loans, buyers' credit, suppliers' credit, securitised instruments such as floating rate notes and fixed rate bonds etc., credit from official export credit agencies and commercial borrowings from the private sector window of multilateral financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc. ECBs cannot be used for investment in stock market or speculation in real estate. The DEA, Ministry of Finance, Government of India along with Reserve Bank of India, monitors and regulates ECB guidelines and policies.
The impact of microcredit 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.
The 1980s was a decade of the Gregorian calendar that began on January 1, 1980, and ended on December 31, 1989. For Bangladesh this decade was characterized by economic hardship, natural disasters and military dictatorship. Hussain Muhammad Ershad ruled Bangladesh almost throughout the decade. Infrastructure development was slow but there was notable progress in local government administration, population control and NGO led microfinance activities which boosted the rural economy. The urge of freedom of speech and return to democracy influenced the cultural activities in the decade.
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