Course Name: Financial Markets & Institutions

Course Code: Fin-523

Assignment-01
‘Banking Financial Institutions in Bangladesh’

Submitted To:
Dr. Sujit R Saha
Professor
Department of Business Administration
East West University.

Submitted By:

Name ID
Mahfuzur Haque 2024-1-91-014
Anik Saha 2022-2-95-037
 Submission Date: 16-11-20224
History of Banking
The history of banking began around 2000 BCE when merchants in Assyria, India
provided grain loans to farmers and traders. In ancient Greece and Rome, temples functioned as
early banks, offering loans, accepting deposits, and changing currency. Archaeological evidence
also points to money lending in ancient China and India. Modern banking traces its roots to
medieval and Renaissance Italy, particularly in wealthy cities like Florence, Venice, and Genoa.
Notable banking families like the Bardi, Peruzzi, and Medici established extensive networks
across Europe, with the Medici Bank founded in 1397 by Giovanni Medici. Banca Monte dei
Paschi di Siena, founded in 1472, is the oldest bank still operating. Banking expanded across
Europe, with significant innovations in Amsterdam in the 17th century and London in the 18th.
The 20th century saw transformative advances in telecommunications and computing, allowing
banks to grow in scale and reach. However, the 2007–2008 financial crisis led to widespread
bank failures and renewed scrutiny of banking regulations.

Banking History in Bangladesh

The first modern bank in Bengal, the Bank of Hindustan, was established in 1770 in
Calcutta but ceased operations in 1832. Several other banks followed, but most collapsed by the
mid-19th century. The Bank of Calcutta, later renamed the Bank of Bengal in 1809, eventually
became the State Bank of India in 1955. The first modern bank in Dhaka, Dacca Bank, was
established in 1846 but was acquired by the Bank of Bengal in 1862. After the 1947 Partition, the
number of operational banks in East Bengal (later East Pakistan) dwindled to just 69 branches by
1951. Post-independence in 1971, The new government designated the Dhaka branch of the State
Bank of Pakistan as the central bank, renaming it Bangladesh Bank, responsible for currency
regulation, credit control, and foreign exchange reserves. The government nationalized the entire
domestic banking sector, reorganizing and renaming banks while allowing foreign-owned banks
to operate. By the late 1970s, the credit system primarily supported government projects and
public enterprises. After independence, Bangladesh's banking sector began with 6 nationalized
commercial banks, 3 state-owned specialized banks, and 9 foreign banks. In the 1980s, the
industry expanded significantly with the introduction of private banks.

How to Establish a Banking Financial Institution in Bangladesh?

According to Section 31 of the Banking Companies Act, 1991, companies must obtain a
Bangladesh Bank license to operate as a bank in Bangladesh. This requires being a public limited
company and having a minimum paid-up capital of Taka 400 crore in liquid form. Sponsors must
provide the initial capital, issue public shares within three years, and limit individual
shareholding to 10% of the bank’s total capital, though this cap may be relaxed for foreign joint
ventures. Additional requirements include restrictions on sponsor eligibility, such as a clean tax
record, no recent loan defaults, and no pending court cases for financial offenses. Sponsor shares
cannot be transferred within three years without Bangladesh Bank's approval.

Classification Of Banks in Bangladesh

Now, banks in Bangladesh are primarily of two types: - i) Scheduled Banks & ii) Non-Scheduled
Banks

SOCBs

7% SDBs
13 9% 4%
% Conventional PCBs
1% Islami Shariah Based
PCBs
49
15 % Digital CBs
%
FCBs

Non-scheduled banks
 No. of
Classification
Banks
State Owned Commercial Banks (SOCBs) 6
Specialized Banks (SDBs) 3
Conventional Private Commercial (PCBs) 33
Islami Shariah Based Private Commercial
(PCBs) 10
Digital Commercial Banks (DCBs) 1
Foreign Commercial Banks (FCBs) 9
Non-scheduled banks 5
Scheduled Banks: Scheduled banks in Bangladesh are banks that are licensed under the Bank
Company Act, 1991 and are included in the Bangladesh Bank Order, 1972. There are 62
scheduled banks in Bangladesh who operate under full control and supervision of Bangladesh
Bank. Scheduled Banks are classified into following types: -
I. State Owned Commercial Banks (SOCBs): There are 6 state-owned commercial banks
 (SOCBs) that are fully or majorly owned by the Government of Bangladesh. State-owned
commercial banks (SOCBs) in Bangladesh are established by the government to promote
economic growth and support industries. Their functions include:
Supporting industries: SOCBs are established to support industries and promote economic growth.
Providing loans and assets: SOCBs provide loans and assets to other state-owned enterprises (SOEs).
However, SOCBs in Bangladesh face a number of challenges, including:
 Political interference: SOCBs are often subject to political interference.
 Non-performing loans: SOCBs have high non-performing loans (NPLs).
 Weak balance sheets: SOCBs have weak balance sheets.
 Underperforming: SOCBs underperform in comparison to foreign-owned and private banks.
 Declining share in banking sector: The share of SOCBs in the banking sector has declined
since the 1990s

II. Specialized Banks (SDBs): Specialized banks (SDBs) in Bangladesh are financial
institutions that are established to achieve specific objectives, such as industrial or
agricultural development. They are fully or majorly owned by the Government of
Bangladesh. 3 specialized banks are Bangladesh Krishi Bank (BKB), Rajshahi Krishi
Unnayan Bank (RAKUB), and Probashi Kallyan Bank. the functions of SDBs in
Bangladesh: -
 Financing small, medium, and large enterprises in the agricultural sector.
 Financing cottage industries, such as cold storage, rice mills, spice grinding, and wooden
and cane furniture
 Financing enterprises for domestic use and export.
 Extending credit in agriculture, cottage, small, and medium sectors.
 Supporting women-headed enterprises

III. Private Commercial Banks (PCBs): Private commercial banks (PCBs) are banks in Bangladesh
that are primarily owned by individuals or private entities and operate for profit. Commercial
banks are basically profit-making institutions. They can be either conventional interest-based
banks or Islamic sharia-compliant banks.

a) Conventional PCBs: Conventional banks are in the business of lending & borrowing money
based on interest. Conventional PCBs banks lend money to clients based on interest, and the
relationship between the bank and the client is that of lender and borrower. They make money
from interest earned on loans, fees, and other sources. Currently, there are 33 conventional
private commercial banks (PCBs) operating within Bangladesh’s banking industry.

b) Islami Shariah based PCBs: Islamic Shariah-based private commercial banks

operate according to Islamic principles derived from the Quran and Sunnah. These
banks avoid interest (riba), as it is prohibited in Islam, and instead focus on profit and
loss sharing arrangements with customers. They prioritize ethical investments,
avoiding sectors that conflict with Islamic values, such as alcohol or pork-related
 businesses, to promote sustainable economic growth. Islamic banks aim to conduct all
operations in a way that aligns with Shariah goals, ensuring fairness and ethical
standards in financial transactions. There are 10 Islami Shariah based PCBs in
Bangladesh.

IV. Digital Commercial Banks: There is 1 digital commercial bank which is owned by
individuals/private entities. It is a digital bank with no branches.

V. Foreign Commercial Banks (FCBs): A foreign commercial bank (FCB) is a bank that
operates in Bangladesh as a branch of a bank incorporated outside of the country. A
foreign bank is defined as a bank where at least 50% of its shares are owned by
foreigners. 9 FCBs are operating in Bangladesh as the branches of the banks which are
incorporated in abroad.

Functions of Commercial Banks:

 The primary function of commercial banks is to accept deposits from the public through various
types of accounts, catering to different needs. Savings Deposits are suited for individuals looking
to keep small savings accessible with occasional withdrawals allowed. Current Deposits are
primarily used by businesses and those with frequent transactions, typically offering no interest.
Fixed Deposits involve depositing a fixed amount for a specific period, earning higher interest,
though withdrawals are restricted until the end of the term. Each type serves a specific purpose,
enabling banks to manage funds for both short and long-term needs.

Key Functions of Commercial Banks in Bangladesh

Receiving Deposits Advancing Loan

Current Saving Fixed Making Bank Cash Discounting

Account Account Deposit Loans Overdraft Credit of Bills

Short Term Mid Term Long Term

Loan Loan Loan

 The second primary function of commercial banks is to provide loans, generally for short
periods, in various forms. Cash Credit allows customers to borrow up to a set limit
 secured by bonds or other collateral. Overdraft enables customers to withdraw more than
their account balance, available only through current accounts. Loans are provided as a
lump sum, with or without security, for a fixed term at an agreed interest rate, and are
often repaid in installments. Discounting Bills of Exchange involves the bank advancing
funds by deducting a discount on a customer’s bill, with the net amount credited to the
customer’s account.
 In addition to loans and advances, banks invest a portion of their funds in government
and industrial securities. These investments include government bills, shares, and
debentures, allowing banks to diversify their assets while supporting both public and
private sectors.
 Banks create credit by advancing loans without directly giving cash to borrowers.
Instead, they open an account in the borrower’s name, increasing the bank's deposit base
and effectively creating credit.
 Modern banks offer agency services to individuals and businesses, including fund
remittance through cheques and drafts, collection and payment of credit instruments like
cheques and promissory notes, and facilitating the purchase and sale of securities such as
shares, bonds, and debentures. These services streamline financial transactions and
investment activities for clients.
 Modern banks offer a range of additional services to meet diverse customer needs. These
include safe deposit lockers, travelers' and gift cheques, letters of credit, and foreign
currency exchange, providing convenience and security in financial management.
 Commercial banks today provide modern services such as issuing credit, debit, and smart
cards, facilitating cash-to-deposit conversions, offering 24/7 payment access through
ATMs, and enabling bank deposit transfers between individuals and businesses. These
functions improve accessibility and ease of financial transactions for customers.

Generations of Banks in Bangladesh

The banking sector of Bangladesh is continuously growing with new banks coming in
from time to time. Bearing in mind, the year of establishment, the Generations of Banks in
Bangladesh is categorized into Four generations.
 First-Generation Banks: - Banks who have licensed in the year between 1971-1990 and
starts their operation are called first-generation banks. Sonali Bank, Janata Bank, Agrani
Bank are the example of first-generation Bank. They were focused on industrial and
agricultural financing, with strong government control and policy alignment, offering
limited customer service and mostly manual operations.
 Second-Generation Banks: - Banks who have been incorporated from the period of
1991-2000 are termed as second-generation banks; like: Prime Bank, DBBL. Their focus
was on corporate and retail banking, expanding branch networks, introducing modern
banking features such as ATMs, and prioritizing commercial and consumer lending.
 Third-Generation Banks: - Banks that get licenses from 2001 to 2012 are called third-
generation banks. BRAC Bank, Shahjalal Islami Bank etc. are example of third
generation banks. The system offers a wide range of financial services, including retail,
 corporate, and SME banking, with improved customer service through ATMs, cards, and
internet banking and a focus on asset quality and risk management.
 Fourth-Generation Banks: - All banks that are getting licenses from 2013 till now are
called fourth-generation banks. They have introduced digital and mobile banking, e-
commerce, mobile financial services, and agent banking, while enhancing customer
experience through digital channels and improved customer service. Union Bank, NRB
Commercial Bank was established in this generation.

Loan-to-Deposit Ratio in Bangladesh

The loan-to-deposit ratio, also referred to as the Advance Deposit Ratio (ADR), is a key
indicator of a bank's liquidity, comparing the total loans given by a bank to its total deposits
within the same period. In Bangladesh, the ADR limits are set by Bangladesh Bank. For
conventional banks, the ratio is capped at Tk 87 in loans for every Tk100 in deposits, while
Shariah-based banks are allowed to lend up to Tk 92 for every Tk100 in deposits. These limits
have been in effect since April 15, 2020.

Statutory Liquidity Ratio in Bangladesh

The Statutory Liquidity Ratio (SLR) in Bangladesh is the percentage of a bank's total
deposits that must be kept in liquid cash, gold, or other securities. The SLR is a monetary policy
tool that the central bank uses to control: Credit growth, Flow of liquidity, and Inflation in the
economy. As of February 1, 2014, the SLR required to be maintained by conventional banks is at
least 13% of their average total time and demand liabilities. For Shariah-based Islamic Banks,
the SLR is at least 5.50%.

Cash Reserve Ratio (CRR) in Bangladesh

The CRR is the percentage of a bank's total deposits that must be kept in cash to Central
bank to ensure the bank can operate without risk. It ensures that funds are secure in emergencies
and that cash is available if customers want to withdraw their deposits. The Cash Reserve Ratio
(CRR) in Bangladesh is 4% on a bi-weekly average basis, with a minimum of 3.5% on a daily
basis. This rate has been in effect since April 15, 2020.

Key Points about Banking Financial Industry in Bangladesh:

The Central Bank of Bangladesh Bangladesh bank
First private bank in bangladesh AB Bank PLC.
First Islamic Bank in bangladesh Islami Bank Bangladesh Limited (IBBL)
First ATM in Bangladesh Standard Chartered Bank
First Mobile Banking Service Dutch-Bangla Bank Limited (DBBL)
First Online Banking in Bangladesh Dutch-Bangla Bank (DBBL)
First Bank to Issue a Debit Card in Bangladesh Dutch-Bangla Bank (DBBL)
First Private Commercial Bank to Issue Credit Card Standard Chartered Bank
First Bank to Offer Mobile Payment Solution bKash; a subsidiary of BRAC Bank Limited
Loan-to-Deposit Ratio in Bangladesh 87% (conventional banks) & 92% (Shariah-based)
Statutory Liquidity Ratio in Bangladesh 13% (conventional banks) & 5.5% (Shariah-based)
Cash Reserve Ratio (CRR) in Bangladesh 4 % (bi-weekly average)

Thank You