"From humble beginnings to a dynamic landscape, Bangladesh's banking industry has undergone a remarkable transformation. Now, a diverse network of banks, from state-owned giants to innovative private players, fuels economic growth and empowers individuals across the nation."
The banking industry is essential to Bangladesh's economy because it makes financial transactions easier, mobilizes savings, and promotes economic expansion.Following the guidelines established by the Bangladesh Bank, these are the principal commercial banks that are active in Bangladesh. There were sixty-one scheduled banks as of December 2020, divided into:
State-owned commercial banks (SCBs): 6
Specialized banks (SBs): 3
Private commercial banks (PCBs): 43
Foreign commercial banks (FCBs): 9
Non-scheduled banks operate with limited licenses and cater to specific segments like rural areas or Islamic banking. There are currently 5 non-scheduled banks.
Bangladesh Bank (BB), the country's central bank, uses a number of instruments and procedures to control scheduled banks and guarantee the stability and integrity of the financial system. It is in charge of capital base maintenance, product rules, licensing, and authorization. It does this by requiring banks to adhere to different monetary policies. BB regularly inspects banks on-site to evaluate their financial stability, risk management procedures, and adherence to legislation. BB uses off-site surveillance to keep an eye on banks' financial accounts, reports, and data in order to spot possible problems and areas for development.
The implementation of Basel III capital adequacy rules by BB has reinforced the capital buffers of banks.
BB released guidelines to enhance credit risk management procedures for loan classification and provisioning for bad and dubious receivables.
In order to encourage responsible lending and consumer protection in the digital financial sector, BB created regulations on mobile financial services (MFS).
According to Bangladesh Bank, as of right now, the entire banking total amount of deposits is 16616493 Taka in million, while loans and advances total 19831976 Taka in million. In general, it is thought that a bank should not have more loans than deposits. It is frequently described as possessing a high loan-to-deposit ratio (LDR). Banks lend out a portion of their deposits, thus a certain amount of LDR is normal; nevertheless, a persistently high ratio raises questions about the bank's viability. Should depositors take out a sizable sum of money all at once, the bank may not have enough easily accessible cash to cover their requests. Bank runs and other financial instability may result from this. The bank may have to take on significant debt from other banks or financial organizations in order to finance its lending operations.This increases the bank's debt burden and exposes it to interest rate fluctuations.
According to the Daily Star, Bangladesh's commercial banks are moving away from their primary duty of making tiny, short-term loans. As an alternative, they are giving a small number of borrowers—often in specialized industries like RMG—huge, long-term loans. There are various hazards associated with this practice:
Concentration risk: The bank's solvency may be at danger if a significant borrower defaults because of a lack of diversification.
Maturity mismatch: When long-term loans are financed by short-term deposits, it can lead to problems with liquidity and the inability to pay checks.
Diminished profitability: There are less prospects for profit because large loans are more likely to default.
Growth hamper: Growth of the stock market is hampered because banks lend money easily, which deters businesses from using the stock market to raise capital.
Restructuring single-borrower exposure and limiting large, long-term bank loans are crucial to reducing these risks. As a result, businesses will be more likely to use the stock market, and the financial ecosystem will become more stable and balanced.
When compared to banks in other Asian nations, the capital base of Bangladeshi banks is rather small. This is caused in part by the large percentage of non-performing loans (NPLs) we have as well as the poor rate of profit reinvested. Banks are required to maintain profit-based contingencies against these non-performing loans. The profitability of banks is directly impacted by high NPLs. Profit is split into two categories after deducting provisions: retained earnings and dividends.
Additionally, banks are urged to lend to underrepresented industries, such as expanding financial services to women entrepreneurs, SMEs, and agriculture—all of which are historically seen as high-risk yet have enormous development potential. In order to improve bank corporate governance and address issues that lead to non-performing loans (NPLs), Bangladesh Bank amended the Bank Company Act. Additionally, BB supports tightening capital adequacy regulations to guarantee banks have enough reserves to cover future losses from non-performing loans.
Banks are crucial in helping migrant workers send money home. Remittances into the country decreased between 2010–11 and 2016–17 compared to previous years, and less money was sent through banking systems as well. However, a robust recovery in international economic activity, particularly in the Middle East countries, resulted in stronger remittances to Bangladesh during the previous fiscal year. The depreciation of the BDT against the US dollar, higher interest rates offered by local banks, and the fact that many banks have been struggling to raise remittance inflows through their respective channels due to a shortage of US dollars stemming from an increase in import payments and a decline in export earnings are the main factors that contributed to the higher remittances through banking channels during the previous fiscal year. Bangladesh Bank's (BB) strengthened surveillance on hundi -- the illegal outlet that many migrant workers use to send money home.
The informal international money transfer network known as "Hundi" functions without interference from the traditional banking system. Bangladeshis send money to a local hundiwala, who then deposits the equivalent amount of foreign currency into the account that person has overseas. In the same vein, migrant laborers who wish to send money home to Bangladesh are the source of foreign exchange for hundiwalas. Unlike bank transfers, Hundi operators provide flexible transaction hours and expeditious money transfers without additional fees. Additionally, there is a possibility that using the official routes for money transfers will reveal the identity of undocumented immigrants living abroad without a valid visa or worker's permit. The demand for Hundi services was further increased by the taka's overvaluation in relation to the dollar.Moreover, the surge in the demand for Hundi corresponds with the escalation of money laundering, benefiting from the absence of a track record..
The impact of Hundi on the accuracy of the current account in the balance of payments is reflected in the decline in remittances from approximately 24.78 billion U.S. dollars in the FY 2020–21 to 21.03 billion U.S. dollars in the FY 2021–22, a decrease of 15.1%, despite being a significant contributor to Bangladesh’s reserves and economic growth, according to an article by the Financial Express. 51 percent of the remittances, according to reports, go through official channels, and the remaining 49 percent go through Hundi.
According to the Financial Express, Bangladesh received roughly US$ 32632.2 million in remittances in FY 2022-2023, of which 51% are routed through legal methods. However, the projected remittance inflow would reach US$ 38899.31 million in the fiscal year 2022–2023 if the use of legal channels for overseas transactions were increased to 80%. The disparity between the two possibilities highlights the significant financial loss that Bangladesh has suffered as a result of the Hundi trades.
Similarly, the foreign reserves stand at $47116.53 million when 51% of remittances are routed through authorized channels. On the other hand, under the second scenario, the potential foreign reserve increases to $56165.4% in 2022–2023. As a result, there is a 19.2% percentage difference between the actual and potential foreign reserves. Notably, over each of the specified fiscal years from 2017 to 2023, foreign reserves have shown a growing tendency.
Bangladesh's foreign reserves peaked in December 2023 at $21868 million; as of March 2024, they were only $19913 million, a considerable decrease. Increased demand for imports, rising global commodity prices, and the dollar's gain are all factors that contribute to deficits in foreign reserves. As a result, this is negatively affecting the L/Cs that importers need. The deposit necessary for importers to issue Letters of Credit has now been raised, increasing the cost of imports, discouraging the import of non-essential items, lowering the number of imports of many vital goods, and upsetting supply chains. When Bangladesh Bank increased the LC margin on non-essential commodities to 75% in July 2022, imports of these goods significantly decreased in the months that followed.
Bangladeshi banks are essential to the functioning of several economic sectors.
Agriculture: Bangladesh Bank reported that the nation's commercial banks have set aside Tk35,000 crore for farmer loans in the current fiscal year 2023–24 in an effort to boost agricultural output. 13.60% more has been allocated than in the previous fiscal year. The goal for agricultural loans in the most recent fiscal year was Tk30,811 crore.
SMEs: According to a Dhaka Tribune story, the central bank is also taking a number of actions to increase lending to SMEs. Bangladesh Bank has mandated that banks and non-bank financial institutions raise the loan disbursement percentage for cottage, micro, small, and medium-sized enterprises (CMSME) to 25% of the total amount of existing loans by 2024. According to The Business Standard, Bangladesh Bank's "Small Enterprise Refinance Scheme for Women Entrepreneurs" has a Tk 3,000 crore target as well: by 2024, it wants to give women entrepreneurs at least 15% of the net credit and advance status in the CMSME sector. Participants in this program who are women-owned businesses are eligible to borrow up to 5% of their profits as interest.
In Bangladesh, Islamic banking has established itself as a major player in the financial sector by carving out a sizable niche. According to BB, as of December 2023, Islamic banks accounted for 25.35% of all deposits and 28.92% of all investments, demonstrating their strong growth and popularity with the general people. There are currently ten fully functional Islamic banks in addition to the Islamic banking branches and windows provided by mainstream banks.
In Bangladesh, demand for digital banking services is growing as well. To make transactions easier, a lot of banks are working with fintech businesses like bkash and Nagad. While the nation's first digital banks are being founded, Bangladesh Development Bank Limited operates a digital banking platform that provides extensive online banking services.
Economic growth: The Bangladesh economy is projected to grow at a healthy pace, creating demand for financial services.
Financial inclusion: Expanding access to finance for unbanked population holds significant potential.
Digitalization: Continued adoption of technology can improve efficiency and reach.
Government initiatives: Supportive policies can foster a more robust and inclusive financial sector.
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