An assignment

On
“Assessing Industry Attractiveness of Banking Industry in Bangladesh
by Applying Michael Porter’s 5 Forces Model”

Course Title : Business Policy and Strategy

Course Code : BBA-4207

Submitted By Submitted To

Md. Yusuf Bin Monir Masum Miah

ID: ASH1510006 M Assistant Professor

Year: 4, Term: 2 Dept. of Business Administration
Session: 2014-2015 Noakhali Science & Technology University
Dept. of Business Administration
(Major in Accounting & Information
Systems)
Noakhali Science & Technology University

Date of submission: 10th September, 2020

Introduction:

The banking industry is considered as one of the most significant drivers in strengthening the
soundness of an economy in terms of investment, job creation, facilitating flow of funds nationally
and globally. Similarly, the banks of Bangladesh have played their part in facilitating investment
and savings as well as economic growth of urban and rural areas. The industry has grown
tremendously after privatization was allowed in the eighties. After more than four decades, the
number of scheduled banks now stands at 57. However, in recent years, the growth of the
profitability of the industry is in the declining trend. Besides, the industry is plagued by non-
performing loan (NPL), large write-offs, scams and stagnant investment. Now, in 2016, it is
imperative to ask the question whether the industry is attractive for new players or investors and
what should be the strategy of the players in the particular industry considering present state of
rivalry. Porter’s Five Forces model gives an objective scenario of the major drivers surrounding
an industry. Besides, many banks use scenario planning to anticipate and respond to volatile and
disruptive environmental changes by using the model. The study is an endeavor to provide an
insight in assessing attractiveness of the Banking Industry.

Michael Porter’s 5 Forces Model:

The Model of the Five Competitive Forces was developed by Michael E. Porter in his book,
“Competitive Strategy: Techniques for Analyzing Industries and Competitors” in 1980. Since that
time it has become an important tool for analyzing an industry structure in strategic processes.
Porters’ model is based on the insight that a corporate strategy should meet the opportunities and
threats in the organizations’ external environment. Especially, competitive strategy should be
based on an understanding of industry structures and the way they change. A survey carried out
in the late 1980s revealed that only a few of the influences Porter flagged commanded strong
empirical support. They asserted that despite the fact that the “Five Forces” framework focuses on
business concerns rather than public policy, it also emphasizes extended competition for value
rather than just competition among existing rivals, and the simplicity of its application inspired
numerous companies as well as business schools to adopt its use. Porter’s Five Forces Model of
competitive analysis is an illustration of how the five competitive forces can be used to explain
low profitability and viable entries to an industry (Hill & Jones, 2007). These Five Forces are the
threat of new entrants, buyer power, supplier power, threat of substitutes, and rivalry among the
already established firms. The intensity of these forces highly determines the average expected
level of profitability in an industry and their thorough understanding, both individually and in
combination, is beneficial in deciding what industries to enter, and in assessing how a firm can
improve its competitive position (www.cgma.org/resources). The strength of each of the five
forces is inversely proportional to the price and profits such that a weak competitive force may
serve as an opportunity, while a strong one, may serve as a threat (Hill & Jones, 2007).

Threat of New Entrants

Threat of new entrants refers the possibility that the profits of established business entity in the
industry may be eroded by new competitors. The extent of the threat depends on existing barriers
to entry and the combined reactions from existing competitors. If entry barriers are high or the
new-comer anticipates a sharp retaliation from established competitors
(www.hbr.org/1979/03/how) competitive forces shape strategy threat of entry becomes low. These
circumstances discourage new competitors. The major barriers to new entries are many including
patents and brand identification. Besides, other major factors that control the entry of new potential
competitors are: economies of scale (minimum size requirements for profitable operations), high
initial investments and fixed costs, cost advantages of existing players due to experience curve
effects of operation, brand loyalty of customers, scarcity of important resources such as qualified
expert staff, access to raw materials and distribution channels controlled by existing players, long-
term service contracts, high switching costs for customers, significant impact of government action
etc.

Bargaining Power of Buyers

Buyers may threaten an industry by forcing down prices, bargaining for higher quality or more
services, and playing competitors against each other. This consequently reduces profitability. The
power of each buyer group depends on the attributes of the market situation and the importance of
purchases from that group compared with the overall business industry.
Bargaining Power of Suppliers

Suppliers can pressurize an industry through price increments or quality reduction of the purchased
products. Powerful suppliers can squeeze the profitability of industry so far that they can't recover
the costs of raw material inputs. They are companies that supply raw materials, equipment,
machinery, associated services and labor.

Threat of Substitute Products

Each business within the industry compete with other banks producing substitute products and
services because substitutes reduce the potential returns of an industry by placing a ceiling on the
prices that business organization in that industry can profitably charge. Identifying substitute
products involves searching for other products or services that can perform the same function as
the industry’s products (www.simonfoucher.com). Similarly to the threat of new entrants, the
threat of substitutes is determined by factors like brand loyalty of customers, close customer
relationships, switching costs for customers, the relative price for performance of substitutes,
current trends.

Rivalry among established firms

Rivalry is the competitive struggle between the business organizations in an industry to gain
market share from each other (Hill & Jones, 2007). It is competing for position whereby business
organizations use tactics like price competition, advertising battles, product introductions, quality
competition and increased customer service or warranties (Hill and Jones, 2007). The competitor
is the first to be dealt in competitive environment.

Overview of the Banking Industry of Bangladesh:

The banking sector in Bangladesh consists of several types of institutions. Bangladesh Bank is the
central bank of Bangladesh and the chief regulatory authority in the banking sector Pursuant to
Bangladesh Bank Order, 1972 the Government of Bangladesh reorganized the Dhaka Branch of
the State Bank of Pakistan as the central bank of the country, and named it Bangladesh Bank with
retrospective effect from 16 December 1971. Other than the Central Bank itself, banks in
Bangladesh are primarily categorized into 2 types. They are Scheduled Banks and Non-Scheduled
Banks.

Scheduled banks

Scheduled banks are licensed under the Bank Company Act, 1991 (Amended up to 2013).
Currently, there are 60 scheduled banks in Bangladesh.

State owned banks (SOBs)

State owned commercial banks (SOCBs)

There are 6 state owned commercial banks (SOCBs) which are fully or majorly owned by the
Government of Bangladesh.

Sonali Bank Limited Rupali Bank Limited

Janata Bank Limited BASIC Bank Limited

Agrani Bank Limited Bangladesh Development Bank Limited

Specialized banks (SDBs)

3 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.

Bangladesh Krishi Bank

Rajshahi Krishi Unnayan Bank

Probashi Kallyan Bank

Private commercial banks (PCBs)

There is a total of 42 PCBs in Bangladesh are in operation right now. They are majorly owned by
private entities and classified into two types.
Conventional PCBs

In total 34 conventional PCBs are now operating in the industry. They perform the banking
functions in conventional fashion i.e. interest based operations.

AB Bank Limited National Credit & Commerce Bank Limited

Bangladesh Commerce Bank Limited NRB Bank Limited

Bank Asia Limited NRB Commercial Bank Ltd

BRAC Bank Limited NRB Global Bank Ltd

City Bank Limited One Bank Limited

Community Bank Bangladesh Limited Padma Bank Limited

Dhaka Bank Limited Premier Bank Limited

Dutch-Bangla Bank Limited Prime Bank Limited

Eastern Bank Limited Pubali Bank Limited

IFIC Bank Limited Standard Bank Limited

Jamuna Bank Limited Shimanto Bank Ltd

Meghna Bank Limited Southeast Bank Limited

Mercantile Bank Limited South Bangla Agriculture and Commerce

Bank Limited
Midland Bank Limited
Trust Bank Limited
Modhumoti Bank Limited
United Commercial Bank Ltd
Mutual Trust Bank Limited
Uttara Bank Limited
National Bank Limited
Bengal Commercial Bank Ltd
Islami Shariah Based PCBs

There are 08 Islami Shariah-based PCBs in Bangladesh and they execute banking activities
according to Islami Shariah-based principles i.e. Profit-Loss Sharing (PLS) mode.

Al-Arafah Islami Bank Limited Islami Bank Bangladesh Limited

EXIM Bank Limited Shahjalal Islami Bank Limited

First Security Islami Bank Limited Social Islami Bank Limited

ICB Islamic Bank Limited Union Bank Ltd

Foreign commercial banks (FCBs)

In total 09 FCBs are operating in Bangladesh as the branches of the banks which are incorporated
in abroad.

Bank Al-Falah Limited (Pakistan) HSBC (Hong Kong)

Citibank N.A (United States of America) National Bank of Pakistan (Pakistan)

Commercial Bank of Ceylon PLC (Sri Standard Chartered Bank (United Kingdom)
Lanka)
State Bank of India (India)
Habib Bank Limited (Pakistan)
Woori Bank (South Korea)

Non-scheduled banks

Non-scheduled banks are licensed only for specific functions and objectives, and do not offer the
same range of services as scheduled banks. There are now 5 non-scheduled banks in Bangladesh.

Ansar VDP Unnayan Bank Grameen Bank

Karmashangosthan Bank Jubilee Bank

Palli Sanchay Bank

Analysis of Banking Industry by applying Porter’s Five Forces Model:

It is assumed that the present state and attractiveness of the banking industry can be assessed by
applying Porter’s Five Forces Model. Porter’s model incorporates five dimensions i.e. Competitive
Rivalry, Bargaining Power of Suppliers, Bargaining Power of Buyers, Threat of Substitutes and
Threat of New Entrants.

Threat of New Entrants:

Barriers to entry in financial services markets include licensure laws, capital requirements, and
access to financing, regulatory compliance and security concerns. The banking industry of
Bangladesh is still in the growth stage. So the threats of entrants of potential competitors are quiet
high. The minimum capital and reserve fund requirement is Tk 400 Crore and the paid up capital
is Tk 200 Crore. Our existing companies have set some entry barriers to deter those competitors
and made it costly and harder to enter into the industry. The common barriers to entry are brand
loyalty, absolute cost advantage, economies of scale and government regulations. In Bangladesh
the brand loyalty is very high. It is evident that a loyal customer of a local or government owned
bank usually does not go for a multinational or other banks whatever their benefits are. This is a
big barrier for the new entrants. Another thing is no bank enjoys an absolute cost advantage, due
to the fragmented nature of the industry. Most of the government banks and some local banks
enjoy scale of economy due to the fact that they have been doing the business for a long time and
they have so many branches all over the county. Multinational banks are also on the process of
achieving economies of scale. Government regulation is quite supportive to the formation and
operations off new banks. So this factor is not that significant. But advances in information
technology have significantly reduced the barriers to entry in the banking industry nowadays. Due
to the adoption of Internet banking, distribution channels are now not limited to traditional branch
networks. Prospective customers all over the world could access the internet and search for banks
offering the highest interest rates or services with the best features. Furthermore, new banks will
also be able to compete by using IT to reduce their cost and extend their distribution channels.
Mobile banking has seen an unprecedented growth in recent years. According to the Bangladesh
Bank data, the industry saw BDT 1.96 trillion in transactions through mobile phones in 2016 which
was 53% up from the previous year. There are about 3.19 crore mobile banking accounts. New
entrants such as bKash changed major determinants of the market environment (e.g. market shares,
pricing, and customer loyalty). As a result, banking industry is under a latent pressure to develop
and market their bank branded mobile financial services. Dutch-Bangla Bank is the second largest
player in mobile money transactions in the country, holding a 9 percent market share while bKash
is the market leader, with a 90 percent share With the supportive regulatory framework of
Bangladesh Bank, bKash has played huge role in over-the-counter mobile money transactions.
Now depositing, withdrawing and transferring money can be done with handset. Moreover, utility
bills and payment for goods and services are transacted through this service. Besides, remittance
can also be received through this mobile financial service. For e-Commerce in Bangladesh, bKash
has become the second biggest payment process in recent years. Such technology has shrunk the
importance of banking channels in money transfer mechanism which is one of the ancillary
services of Banking. MFS has impact over the banking industry on the following factors:

 Customer’s dependency on Branch and ATMs for money transfer

 Customer’s dependency on Bank’s card
 Bank’s pricing strategy for money transfer services
 Bank’s acquisition of low cost deposit
 Tapping the rural customers’ deposit with huge scale and network
 Remittance services

As a result, we see proliferation of mobile financial services by the banks signaling more
competition for collection of deposits. Considering all these factors, the threat of new entrants
is negative.

Bargaining Power of Buyers:

Buyers of banking services are institutions, organized groups, Non-Governmental Organizations,

Faith Based Organizations, Community Based Organizations and individual clients. Bargaining
power of customers is relatively low as it is partly controlled by the government. In Bangladesh,
the volume of buyer is huge in the financial sector. Only in the banking industry, formal bank
accounts exceed 5.5 crore in more than 9,000 branches. For banking industry buyers are the
customers who take loans from the bank. Buyer power in the banking industry is low. The
bargaining power of the buyers depends on the following factors:

 Number of loan applicants: There are not enough business loan applicants in our country.
There are more than 50 banks in our banking industry including the Multinationals and
nationalized banks. Because of lacking of loan applicants banks are setting with their idle
money in hand, mostly in the form of personal credits. For this reason, the competitions
among existing businesses are increasing day by day.

 Switching cost: Switching cost is very low in our banking industry. Every single bank is
giving the same loan at same interest rates. So, an individual who wants to take loan can
switch easily from one bank to another if he or she doesn’t like the term and condition of
a particular bank. Lower switching cost makes the industry more competitive.

 Threat of backward integration: In the banking industry, there is always a chance for
threat of backward integration. Corporation or big multinational again can be threat to the
commercial banks. They can give the threat that they will arrange their money by forming
another bank where the cost of fund will be low compared to other banks. For this reason,
giant customers of this industry are having more power than their banks.

Considering all these, bargaining power of buyers is positive.

Bargaining Power of Suppliers:

Suppliers of banks may include trade unions for the supply of labor force, Automated Vending
Machine suppliers, cleaning services, IT consultants, marketing agents just to mention. (Dagmar,
2001). Bargaining power of suppliers can be considered as a threat when the suppliers have that
capability of forcing up the price that a company must pay higher for what they supply or reduce
the quality. This process ultimately depresses company’s profitability. But if the suppliers are weak
then it can be reverse process. Supplier power in banking industry is low. For the bank the main
supplier of fund is the depositors. Bank also gets its fund from the directors. So, the strength of the
supplier’s depends on the following factors:

 Number of supplier: Bargaining power of suppliers is low in the banking industry because
there is a lot of individual saving in the economy but banks don’t have too many
opportunities to invest.

 Threat of forward integration: We all know that bank makes money by investing others
money. It can happen that corporations or big multinational companies can give threat to
the private banks that they will form another bank for depositing their money. They will
not supply fund to other banks. So this can be a great threat by forward integration.

Considering all these, bargaining power of suppliers is positive.

Threat of Substitute Products

Besides, 9000+ bank’s branches, there are 18,000 branches of NGO-MFIs, 1,200 thousands post
offices and 183,000 co-operative outlets totaling about 2.1 lakh branches/outlets for the 56.6
million economically active population - generating at least one financial service point per 270
people. Banks are mainly in deposit collection and lending services, and as explained in the threat
of new entrants, ancillary services such as collection of deposits are being replaced by mobile
banking financial services. Utility services, remittance services are also being slowly replaced by
the mobile based financial service provider. Cards business and alternative delivery channels are
also seeing a massive pressure from substitutes like bKash, internet banking. Virtual payment
system such as PayPal is underway. All these mechanisms surely pose a threat in the role of transfer
and collection of deposit. Due to the high investment cost incurred for the Banks in operating
branches and ATMs, it is difficult for banks to give up the model and pursue similar strategies of
mobile based financial services. In case of lending services, Non-Bank Financial Institutions’
(NBFIs) role is gaining importance. NBFIs are financing large projects sometimes with almost
same lending rate of commercial banks. Not only corporate clients, the NBFIs are offering lending
services for House Loan, Car Loan etc. Leasing services, insurance services with different deposit
plans, mutual funds etc. are provided by the NBFIs which make the entry into the banking industry
very competitive. Considering all these, the forces behind threat of substitute is negative.

Conclusion:

It is obvious that Porter’s Five Forces Model gives a bird’s eye view of the competition,
opportunities and in turn attractiveness of the banking industry. By this exploratory study, it may
be concluded pertinently that factors of competition such as similar pricing of products and
services, cut-throat competition, evolution and dominance of Mobile Financial Services, threat of
substitutes pose a very strong rivalry for the existing competitors and upcoming players. Thus,
riding on the current trends and achieving economies of scale will be a priority in the coming days
as loyalty of the customers will be harder as switching cost will be lower. Players in the industry
should periodically undertake such studies to determine the effective strategies for achieving
competitive advantage.

It has been objectively assessed that Competitive Rivalry is negative as 57 banks operate with
more than 9000+ branches where the market share is segregated. Bargaining Power of Buyers is
low as the government plays a role to control the interest rate and the banks almost give same
services to the buyers. Threat of New Entrants is also negative. Mobile Financial Services (MFS)
are gaining huge momentum. The Bargaining Power of Suppliers is not high as there are idle fund
of Tk 1140 billion and shareholders are risk averse. Threat of Substitutes is also negative
considering the similar lending and deposit services by the NBFIs and MFS substituting the
transfer of funds. Considering the negative & positive dimensions and other factors that have
influence on the Five Forces, it can be inferred that currently the banking industry is not
attractive for new business.