Bank is the financial institution that deals with money and money worth instruments. A bank is a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. “A bank is a financial establishment which Uses money deposited by customers for investment, pays it out when required, makes loans at interest” – Oxford Dictionary (2008). “Banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by queue, draft, order or otherwise” –
According to Section 5(b) of Banking Regulation Act, 1949. “A bank is an establishment which makes to individuals such advances of money as may be required and safely made, and to which individuals entrust money when not required by them for use” – According to Professor Kinney. In the SOUth Asian region, early banking system was introduced by the Afghan traders popularly known as Subclasses. Muslim businessmen from Kabul, Afghanistan came to India and started money lending business in exchange of interest sometime in 1312 A. D. They were known as ‘Subclasses’.
Brief history of Banking in Bangladesh: After the liberation war, and the eventual independence of Bangladesh, the Government of Bangladesh reorganized the Dacha branch of the State Bank of Pakistan as the central bank of the country, and named it Bangladesh Bank. This reorganization was done pursuant to Bangladesh Bank Order, 1972, and the Bangladesh Bank came into existence with retrospective effect from 16 December 1971. The bank was responsible for regulating currency, controlling credit and monetary policy, and administering exchange control and the official foreign exchange reserves.
The Bangladesh government initially nationalized the entire domestic banking system and proceeded to reorganize and rename the various banks. Foreign-owned banks were permitted to continue doing business in Bangladesh. The insurance business was also nationalized and became a source of potential investment funds. Cooperative credit systems and postal savings offices handled service to small individual and rural accounts. The new banking system succeeded in establishing reasonably efficient procedures for managing credit and foreign exchange.
The primary function of the credit system throughout the asses was to finance trade and the public sector, which together absorbed 75 percent of total advances. The government’s encouragement during the late asses and early 1 sass of agricultural development and private industry brought changes in lending strategies. Managed by the Bangladesh Shirks Bank, a specialized agricultural banking institution, lending to farmers and fishermen dramatically expanded. The number of rural bank branches doubled between 1977 and 1985, to more than 3,330.
Denationalization and private industrial growth led the Bangladesh Bank and the World Bank to focus their lending on the emerging private manufacturing sector. Scheduled bank advances to private agriculture, as a percentage of sector GAP, rose from 2 percent in FYI 1979 to 11 percent in FYI 1987. No sound project-appraisal system was in place to identify viable borrowers and projects. Lending institutions did not have adequate autonomy to choose borrowers and projects and were often instructed by the political authorities.
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. It became more common or 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. The rate of recovery on agricultural loans was only 27 percent in FYI 1986, and the rate on industrial loans was even worse.
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. As a consequence, recovery rates began to improve in 1987. The National Commission on Money, Credit, and Banking recommended broad structural changes in Bangladesh system of financial intermediation early in 1987, many of which were built into a three-year compensatory financing facility signed by Bangladesh with the MIFF in February 1987.
One major exception to the management problems of Bangladesh banks was the Grahame Bank, begun as a government project in 1976 and established in 1983 as an independent bank. In the late asses, the bank continued to provide financial resources to the poor on reasonable terms and to generate productive elf-employment without external assistance. Its customers were landless persons who took small loans for all types of economic activities, including housing. About 70 percent of the borrowers were women, who were otherwise not much represented in institutional finance.
Collective rural enterprises also could borrow from the Grahame Bank for investments in tube wells, rice and oil mills, and power looms and for leasing land for joint cultivation. The average loan by the Grahame Bank in the mid-asses was around Take, 000 (US$65), and the maximum was just T k 18, 000 (for construction of a tin-roof house). Repayment terms were 4 percent for rural housing and 8. 5 percent for normal lending operations. The Grahame Bank extended collateral-free loans to 200,000 landless people in its first 10 years.
Most of its customers had never dealt with formal lending institutions before. The most remarkable accomplishment was the phenomenal recovery rate; amid the prevailing pattern of bad debts throughout the Bangladesh banking system, only 4 percent of Grahame Bank loans were overdue. The bank had from the outset applied a specialized 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.
The Grahame Bank was expanding rapidly, planning to have 500 branches throughout the country by the late asses. 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. The policy was largely successful in reducing the growth of the money supply and total domestic credit. Net credit to the government actually declined in FYI 1986. The problem of credit recovery remained a threat to monetary stability, responsible for serious resource misapplication and harsh inequities.
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. Foreign exchange reserves at the end of FYI 1986 were IIS$476 million, equivalent to slightly more than 2 months worth of imports. This represented a 20-percent increase of reserves over the previous ear, largely the result of higher remittances by Bangladesh workers abroad. The country also reduced imports by about 10 percent to US$2. Billion. Because of Bangladesh status as a least developed country receiving concession loans, private creditors accounted for only about 6 percent of outstanding public debt. The external public debt was US$6. 4 billion, and annual debt service payments were US$467 million at the end of FYI 1986. Bangladesh Bank is the banker to the government as well as to other banks. It formulates and implements monetary policy manages foreign exchange reserve and is the authority to supervise and jugulate other banks and non-bank financial institutions.
The financial sector of Bangladesh has gone through a lot of reforms in the past two decades and central bank reform was a key element of the reform agenda. List of banks: The banking system of Bangladesh is now composed altogether 49 Banks. Among them, four state-owned commercial banks, five specialized development banks, twenty eight private commercial Banks and twelve foreign commercial banks. The Nobel-prize winning Grahame Bank is a specialized micro-finance institution, which revolutionized the concept of micro-credit and contributed greatly towards poverty reduction and the empowerment of women in Bangladesh. A. Central Bank. . State-owned Commercial Banks. C. Private Commercial Banks. D. Foreign Commercial Banks. E. Specialized Development Banks. Central Bank: Bangladesh bank Pursuant to Bangladesh Bank Order, 1 972 the Government of Bangladesh reorganized the Dacha 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. Bangladesh Bank (B) has been working as the central bank since the country’s independence. Its prime jobs include issuing of currency, maintaining foreign exchange reserve and providing transaction facilities of all public monetary matters.
B is also responsible for planning the government’s monetary policy and implementing it thereby. The B has a governing body comprising of nine members with the Governor as its chief. Apart from the head office in Dacha, it has nine more branches, of which two in Dacha and one each in Chitchatting, Rajahs, Chula, Bogart, Sylphs, Ranging and Barista. Bangladesh Bank (B) regulates and supervises the activities of all banks. The B is now carrying out a reform program to ensure quality services by the banks.
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