Chapter-1

Introduction
Bank
Bank is a financial institution that collects society’s surplus cash and gives a part of that as
loan to investors for earning profit.
Bank is an intermediary institution that makes relationship (work as a trusted partner) between
the owner of the surplus savings and the investor of deficit capital.
Banks earn profit by receiving interest(profit) from the borrowers who want to take short-term
and or long-term loans and making relatively lower interest(profit) payment to the depositors
for providing their funds for use by the bank.
According to The Dictionary of Banking and Finance, “Bank is an institution that is registered by
central bank and mainly perform the following activities-
i. receive current deposit and give the withdrawal facilities to clients through cheque
ii. receive term deposit and pay interest on it
iii. discounting notes, approving loans, and invest in government and other credit
instruments
iv. collect cheque, draft, and note etc.
v. issue draft, and cashier’s cheque
vi. notification of depositor’s cheque
vii. act as a trustee in accordance with government permission”
Banking System Around the World
We can divide the major commercial banking systems in different countries in the following groups:
1. Anglo-American Banking System
This system is prevalent in most of the countries in the world along with Bangladesh. There are
differences between commercial banking and investment banking. Commercial banks cannot operate
investment banking activities.
2. German Universal Banking System
There is no difference between commercial banking and investment banking. Commercial bank can
operate any type of business activities. Commercial bank can buy up to 40% shares of corporate firms
and participate in the ownership of the firm.
3. Japanese Main Banking System
This is the hybrid form of the above two systems. In this system, there are differences between invest
banking and commercial banking but commercial banks have no restriction to participate in the
ownership of corporate firm.
4. Indian Lead Banking System
This system divides the country’s geographical area in different segments and only one leader bank is
selected for each area. The purposes of this system are to increase the rate of savings, equitable
allocation of financial resources on the basis of some criteria to various sectors of the economy and to
increase efficiency in investment and production.
Banking System in Bangladesh
After the independence, banking industry in Bangladesh started its journey with 6 Nationalized
commercialized banks, 3 State owned Specialized banks and 9 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 that remain in the list of banks maintained under the
Bangladesh Bank Order, 1972.
• Non-Scheduled Banks: The banks which are established for special and definite objective and
operate under any act but are not Scheduled Banks. These banks cannot perform all
functions of scheduled banks.
• There are 59 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:
1. State Owned Commercial Banks (SOCBs): There are 6 SOCBs which are fully or majorly
owned by the Government of Bangladesh. Sonali Bank Limited, Janata Bank Limited, Agrani
Bank Limited, Rupali Bank Limited, BASIC Bank Limited, Bangladesh Development Bank Limited
2. 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
Banking System in Bangladesh…(continues)
3. Private Commercial Banks (PCBs): There are 41 private commercial banks which
are majorly owned by individuals/the private entities. PCBs can be categorized into
two groups:
i. Conventional PCBs: 33 conventional PCBs are now operating in the industry. They
perform the banking functions in conventional fashion i.e interest based operations.
ii. Islami Shariah based PCBs: There are 8 Islami Shariah based PCBs in Bangladesh
and they execute banking activities according to Islami Shariah based principles i.e.
Profit-Loss Sharing (PLS) mode.
4. Foreign Commercial Banks (FCBs): 9 FCBs are operating in Bangladesh as the
branches of the banks which are incorporated in abroad.
• There are now 5 non-scheduled banks in Bangladesh which are:
i. Ansar VDP Unnayan Bank,
ii. Karmashangosthan Bank,
iii. Grameen Bank,
iv. Jubilee Bank,
v. Palli Sanchay Bank
Non-Bank Financial Institutions (FIs)
Non Bank Financial Institutions (NBFIs) are those types of financial institutions which
are regulated under Financial Institution Act, 1993 and controlled by Bangladesh Bank.
Now, 34 FIs are operating in Bangladesh while the maiden one was established in 1981.
Out of the total, 2 is fully government owned, 1 is the subsidiary of a SOCB, 15 were
initiated by private domestic initiative and 15 were initiated by joint venture initiative.
Major sources of funds of FIs are Term Deposit (at least three months tenure), Credit
Facility from Banks and other FIs, Call Money as well as Bond and Securitization.

The major difference between Banks and NBFIs are as follows:

•FIs cannot issue cheques, pay-orders or demand drafts.
•FIs cannot receive demand deposits,
•FIs cannot be involved in foreign exchange financing,
•FIs can conduct their business operations with diversified financing modes like syndicated
financing, bridge financing (is an interim financing option used by companies and other
entities to solidify their short-term position until a long-term financing option can be arranged)
, lease financing, securitization instruments (the conversion of an asset, especially a loan,
into marketable securities, typically for the purpose of raising cash by selling them to other
investors), private placement of equity etc.
Rationale of Increasing Importance of Bank Management
The only way to achieve handsome amount of profit compared to similar
kind of organizations is to establish skilled and efficient management in any
organization.
Bank is a profit oriented organization, therefore its management procedure
is more challenging as regulatory system always is there to control the bank
management.
Rationale of Increasing Importance of Bank Management…(continues)
1. Changing regulation for Banks:
It is normal phenomenon to change banking procedure from time to time in the
same country or in different countries according to the public benefits. Bank
regulatory authorities are more careful to prevent bank failure, to ensure the safety
of the fund of depositors, and to ensure loan distribution for all. Day by day bank
management becomes more challenging by introducing rules and regulations by
bank regulatory authorities
2. Increasing competition due to changing technological development
The bank which can attract more clients, can create clients repeatedly. This
technological environment absorbs more investment and new training. So, the
management of bank created new strategy of banking services adjusted in
competitive banking business
3. Changing international relationship
In international banking business, the bank faces extensive amount of legislation in
the event of a new problem. International relations, global or bilateral creates more
competition in banking business. Other factors, such as change in international
trade and commerce, laws of fund transfer, change of social and cultural factors
establish new operational management system which challenges the banking
business
Need for study of environment in banking
Bankers need to study closely the changes in the environment of banking in order to
aptly handle the following problems:
a. Variation in demand for money: the bankers need to know and should have the
ability to predict how much volume of money the depositors are expected to
withdraw from the accounts within a certain limit of time
b. Variation in credit demand: the demand for credit varies in various period of time.
So the bankers need to have the idea about how much to allocate for short term
credit and how much to allocate form long term credit
c. Variation in funds supply: the bankers need to have a clear idea about when and
for what reason, the depositors and the central bank will increase or decrease
the supply of fund, the bankers need to have ideas about those
d. Variation in interest rate: the bankers need to have a clear idea about the rise
and fall of interest rate on both depositors money and disbursed loan to the
borrowers. A study of environment will help bankers tackle such situation
e. Variation in credit condition: the terms and conditions of credit is influenced by
the environment. So when environment changes, it requires a change in the
terms and conditions of credit policies
Internal factors of environment in banking
Internal factors of environment of banking are divided into two parts:
A. Factors relating to organization
1. Location of bank
2. Lay out designing of bank
3. Defined goals and policies
4. Responsibility and duty
5. Adequate place and logistics for work
6. Trade union
7. Promotion and transfer on the basis of efficiency
8. Efficient deposit and credit operation
9. Efficient management
10.Financial solvency
11. Financial discipline
12.Services rendered
13.Method of work
14. Uses of modern technology
15. Relation of bank with customers
16.Bureaucratic complexity
Internal factors of environment in banking…(continues)
Internal factors of environment of banking are divided into two
parts:
B. Factors relating to bank employees
1. Number of employees
2. Efficient employees
3. Service oriented attitude
4. Loyalty to the bank
External factors of environment in banking
Internal factors of environment of banking are divided into five parts:
A. Economic factors: state of development of financial system,
adequacy of fund, communication system, free market economy,
monetary and fiscal policy, industrial policy, investment opportunity,
healthy competition, pricing policy, import/export policy, role of
government, role of central bank
B. Political factors: ideology of the state, attitude of the government,
development work, support to the businessmen;
C. Social factors: values, security, education, cultural consciousness,
banking habit;
D. Legal factors: business control laws, tax laws, import and export
laws, fiscal laws;
E. Technological factors