Academic journal article The Journal of Developing Areas

Profit Maximizing Behavior of Banks in Bangladesh

Academic journal article The Journal of Developing Areas

Profit Maximizing Behavior of Banks in Bangladesh

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Background

Banks, the dominant financial intermediary in Bangladesh, essentially involves in transferring funds in exchange of goods and services along with making promises of future return. Banking industry of Bangladesh has been facing new challenges with the changing times. The use of information and technology (IT) has brought various dimensions in the working style of the banks. The changing dynamics of banking business brings new kind of risk exposure particularly after the global financial crisis (GFC). Bangladesh's banking industry has been amongst the few to maintain strong resilience amidst this global economic downturn. However, looking at the overall governance issue, capital level, asset quality, profitability and non-performing loans the banking industry of Bangladesh gives a diverse picture. While foreign and private commercial banks are performing well, the outcome of the state owned commercial and specialized banks are not so encouraging in terms of these indicators. Despite these weaknesses, the banking industry in Bangladesh has shown a remarkable tempo over the past decade. Notwithstanding higher non-performing loans and weak governance issues, higher pace of credit expansion and an extensive focus on financial inclusion have contributed to make banking industry of Bangladesh relatively stable.

The banking system at independence consisted of 2 branch offices of the former State Bank of Pakistan and 17 commercial banks. After independence, the then Bangladesh Government initially nationalized the entire domestic banking system and proceeded to reorganize and rename them. Foreign-owned banks were permitted to continue doing usual business. As a result of mass nationalization, the banking industry of Bangladesh had to face an undesirable non-competitive situation failing to deliver expected products and services in an efficient and adequate manner. During the late 1970s and early 1980s, government's move towards agricultural and private sector development brought changes in the lending strategies. Managed by the Bangladesh Krishi Bank, lending to farmers and fishermen significantly expanded. Aided by consistent Bangladesh Bank (BB) policyi, the number of rural bank branches has grown significantly. As of end February 2016, there are 5338 rural braches as compared with 4072 urban branches of banks in Bangladesh.

To infuse competition in the financial system two banks were denationalized in 1984 and a number of new banks were permitted to operate in the private sector in 1986. At the same time, a National Commission on Money, Banking and Credit was constituted by the Government to identify problems and suggest remedies of the problems in banking sector. Following the publication of the study report of the Commission, the World Bank took an in-depth study of the financial sector and suggested reforms to ensure safety, soundness and efficiency in the banking sector. Largely based on these suggestions Government adopted a number of institutional and policy reform/liberalization measures since 1989-90. These were aimed at liberalization of deposits and lending rates and make them flexible to meet market needs with a view to improving allocation of resources, replacement of direct credit control with indirect monetary instruments, strengthening of prudential guidelines for bank supervision by the Central Bank, establishment of appropriate accounting policies including loan classification and provisioning, improvement in capital base of banks and strengthening the legal framework of debt recovery and regulations affecting financial institutions by improving regulatory power of the Bangladesh Bank, and good governance of the public financial institutions.

The Financial Sector Reforms Program (FSRP) was launched in 1990 on the basis of the recommendations of a World Bank Consultative Mission under Financial Sector Adjustment Credit (FSAC). The financial sector reform has become a continuous process, which is being carried out in five phases. …

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