BFM Report Final

8/19/2019 BFM Report Final

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REPORT On

Banking Industry Bangladesh

SUBMITTED BY

Group-4, Section- A

Bank Fund

Management

Date of Submission:

8/!/!"#


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Table of Content

1.Introduction …………………………………………………………………. 1

2.Review of previous empirical literature ………………………………….. 5

3.Banking Industry in Bangladesh …………………………………………... 74.Major problem faced by Bangladesh Banking industry ………………… 8

a.Low quality of assets………………………………………….. 9

b.Lack of good governance, accountability and transparency.. 9

c.Inadequacy of effective risk management system………….. 10

5.Possible strategies to overcome banking sector problems ………………. 12

6.Data and method of analysis………………………………………………... 13

7.Empirical results and discussion…………………………………………… 26

8.Recommendations…………………………………………………………… 27

9.Conclusion……………………………………………………………………. 2810. References……………………………………………………………………. 28

Introduction


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The study focuses on banking system in Bangladesh. Banking sector as the major sector

contribute to the national economy. The business of banking is expanding in Bangladesh and

the activities of bank are being explored to serve the clients. The study has been made based on

using information taken from annual reports of Government Banks, the Commercial Banks,

Islamic Banks and Foreign banks, and information taken from different journal, articles,

publication paper, and other sources. Banking Industry Bangladesh is going through some

problems among which some are long term, some are medium term and some are short terms.

In this study we have tried to find out those problems along with the solutions for them. And

for this purpose first we have gone through some previous literature and then we have done

our analysis to find out the best result. Though banks have some secret issues and it is not

possible for the researcher to go through them but here we have tried our level best to find out

the true picture of Bangladesh banking industry

.

Banking Industry in Bangladesh:

Banks are among the most important sources of short term working capital for businesses and

have become increasingly active in recent years in making long-term business loans .The main

function of a commercial bank is to mobilize deposits and to provide loans to people and

organizations to finance their consumptions and business activities. Thus banks encourage the

flow of money to productive use and investment which accelerates the flow of economic growth

and the economy of Bangladesh has been growing gradually and as such it needs the support

of a financial structure. Banking industry in Bangladesh up to now is leading the financial

system. Based on the time of inception all the commercial banks have been divided into three

generations. Banks of all the three generations are introducing new and new products to meet

the dimensional demands of customers. After the liberation, the Bangladesh government

initially nationalized the entire domestic banking system by Presidential Order No. 26 titled

Bangladesh Banks Nationalization Order, 1972 and proceeded to reorganize and rename the

various banks. Foreign owned banks were permitted to continue doing business inBangladesh .At birth, Bangladesh inherited an interest based banking system, which was

introduced here earlier when the country was a part of British Colony. Since its inception

Bangladesh saw a new trend in banking both at home and abroad. Islamic banking was

successfully tries in Egypt. The Banking sector in Bangladesh is different from the banking as

seen in other developed countries. This is one of the Major Service sectors in Bangladesh

economy, which divided into four categories of scheduled Banks. These are Nationalized

Commercial Banks (NCBs), Government Owned Development Financial Institutions

(DFIs), Private Commercial Banks (PCBs), and Foreign Commercial Banks (FCBs).


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%&Bs

'&Bs

DF(sF&Bs

4

Banks across the globe have received the considerable amount of pressure from its diverse

stakeholders including shareholders, investors, media, NGOs and customers (Bhattacharya et

al., 2004 ;) to carry out business in a responsible and ethical manner. Siddique and Islam (2001)

states that Banking sector of Bangladesh is one of the major sectors, which contributes

significantly .The sector comprises a number of banks in various categories. A bank connects

customers with capital deficits to customers with capital surpluses. Bangladesh Bank

supervises and regulates the country’s banking sector where it has significant improvements

(Ahmed, 2006). Green (1989) revealed that a bank's responsibility extends to Government,


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customers, shareholders, staff, and the community. Companies do have ethical responsibility,

but it is not protected by limited liability from the consequences of their actions. Lyne, Nielson,

and Tierney (2009) evaluated and analyzed 10 000 Multilateral Development Banks (MDBs)

loans from 1980 to 2000. They found that (MDBs) dramatically increased social lending for

health, education, and safety nets after 1985. Yet the great powers’ social policy preferences

remained relatively static from 1980 to 2000.

Banking System Structure:

The objectives of this study are 1)to find out the major problems faced by Bangladesh banking

industry. 2) Possible strategies to overcome banking sector problems and using data and

methods for analyzing the situations.

Literature Review:

With respect to the Performances of Bangladeshi Banking sector, foreign and national experts

undertook number of studies.

Pandey (2006) stated that the easiest way to evaluate the performance of a firm is to compare

its present ratio with the past ratio. It gives an indicator of the direction of change and reflects

whether the firm’s financial performance has improved, deteriorated or remained constant

over time.

Chowdhury and Ahmed (2009) observed that all the selected private commercial banks are able

to achieve a stable growth of branches, employee, deposit, loans and advances, net income,

earning per share during the period of 2002-2006. They indicate that the prospect of privatecommercial banks in Bangladesh is very bright.


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Chowdhury (2002) observed that the banking industry of Bangladesh is a mixed one

comprising nationalized, Private and foreign banks. Many efforts have been made to explain

the performance of these banks. Understanding the performance of the bank requires

knowledge about the profitability and the relationship between variables like market size, banks risk and banks market size with the profitability.

Chowdhury and Islam (2007) stated that deposit and loan advances of nationalized

commercial banks (NCBs) are less sensitive to interest changes than those of Specialized

Banks (SBs). So, SBs should not make abrupt change in lending or deposit by following the

NCBs. If NCBs change their lending rate, their deposit or loan and advances will be affected

less than those of CBs. Moreover, deposits of NCBs have higher volume and higher volatility

than those of SBs. However SBs offer higher deposit rates and charge higher lending rate than

NCBs, which is why the interest rate spread of SBs was higher than that of NCBs.

Siddique and Islam (2001) pointed out that the commercial banks, as a whole are performing

well and contributing to the economic development of the country. The average profitability of

all Bangladeshi Banks collectively was 0.09% during 1980 to 1995 which means that a profit of

Tk.0.09 was earned by utilizing assets of Tk.100 in every aspect of profit; banking sector

contributes the national economy as well as the individual organization. Despite overall

growth of the banking sector positive the performance of different categories of banks were

not equally attractive.

Mujeri & Younus (2009) stated that the higher the non interest income as a ratio of total assets

of banks the lower interest rate spread. Similarly market share of deposit of a bank, statutory

reserve requirement and NSD certificate interest rate affects the IRS. The analysis in terms of

banks group shows that IRS is significantly influenced by operating cost and classified loan of

state owned commercial bank and specialized banks while inflation, operating cost market

share of deposit, statutory reserve requirement and taxes are important for the private

commercial banks. On the other hand non interest income, inflation, market share and taxes

matter for the foreign Commercial banks.

Khan (2008) stated that bank is evaluated based on profit and loss as the same way for other

business. If the shareholders of the bank get more profit then the bank is identified as

successful. Banks can attain success if relevant risks are effectively controlled.

*an +orne ac.oic0 1!""#2 stated t.at to e3auate a 5rm6s 5nancia condition

and performance t.e 5nancia ana7st need to perform c.eckups9 on 3arious

aspects of a 5rm6s 5nancia .eat. A too fre;uent7 used t.ese c.eckup is a

5nancia ratio

In the area of corporate governance practices of banks, three strands of literature are found.First strand focuses on how the corporate governance practices in banks differ from those in

non-banking firms (Prowse, 1997; Furfine, 2001; Morgan, 2002; Macey and OHara, 2003).‟


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Banks have two related characteristics that inspire a separate analysis of the corporate

governance of banks (Furfine, 2001). First, banks are generally more opaque than non-financial

firms. Although information asymmetries plague all sectors, evidence suggests that these

informational asymmetries are larger with banks (Furfine, 2001). From the perspective of banking, loan quality is not readily observable and can be hidden for long periods. Therefore,

Morgan (2002) found that bond analysts disagree more over the bonds issued by banks than

by non-financial firms. The comparatively severe difficulties in acquiring information about

bank behavior and monitoring ongoing bank activities hinder traditional corporate

governance mechanisms (Levine, 2004).

The second strand of literature looks at how better governance practices in banks can help

their financial development and growth (Levine, 1997; Bushman and Smith, 2003). Bushman

and Smith discussed economics-based research focused primarily on the governance role offinancial accounting information and propose future research ideas. As presented in their

study, a framework that isolates three channels through which financial accounting

information can affect the investments, productivity, and value-added of firms namely the use

of financial accounting information by managers and investors, the use of financial accounting

information in corporate control mechanisms and the use of financial accounting information

to reduce information asymmetries among investors. The third strand looks at corporate

governance practices in banks from the perspective of its impact on performance and

efficiency of the banks themselves (Jensen and Meckling, 1976; Hovey et al, 2003). Andres andVallelado (2008) have examined the corporate governance in banking: the role of the board of

directors. They pointed out that bank board composition and size are related to directors‟

ability to monitor and advice management, and that larger and not excessively independent

board might prove more efficient in monitoring and advising functions, and create more value.

Kutubi (2011) has examined board of directors size, independence and performance: an‟

analysis of private commercial banks in Bangladesh. This study has examined the impact of

board size and the independent directors on the performance of the local private commercial

banks in Bangladesh. The study has found that statistically significance positive relationshipexisted between the proportions of the independent directors and the performance of the

banks. Hossain (2011) highlighted the corporate governance practices in Bangladesh. The

study has pointed out that good corporate governance has implication for company behavior

towards employees, shareholders, customers & banks. He has suggested that improving

corporate governance can provide significant rewards to both individual companies and

countries. Rashid et al (2010) have examined board composition and firm performance from

Bangladesh perspective. The study has also examined the influence of corporate board

composition in the form of representation of outside independent directors on firms=

economic performance in Bangladesh. The finding of the study has provided an insight to the

regulators in this quest for harmonization of internal corporate governance practices. Rashid


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et al (2009) have made an overview on corporate governance in Bangladesh. The study has

identified six specific corporate governance characteristics in relation to current corporate

governance practices in Bangladesh namely legal and regulatory frame work, weak

institutional control, pre-dominant of individual investors, limited transparence & weakdisclosure practices etc.

Problems faced by Bangladesh Banking industry:

We have classified the banking industry into two groups-

1.Major problems

2.Minor problems

Major problems faced banking industry are:

1.Lower Quality of Assets

2.Capital Inadequacy

3.Low credit growth rate

4.Low earning performance

5.Surplus liquidity6.Weak Regulatory System

7.Weak capital market role

8.Bank ownership structures are dominated by family members

9.Accounting standards and disclosure and its impacts on banking industry and

management practices in Bangladesh are mixed:

10.Inadequacy of effective risk management

11.Lack of accountability and transparency

Minor problems faced by banking industry are:

1.Inadequate Bankruptcy Laws

2.Inconsistency between Companies Act

3.Weak Capital Market Role

4.No Market for Corporate Control

5. Most companies in Bangladesh are closely held and a negative correlation exists

between good Corporate Governance and defaulting in holding annual general

meetings in due time.

6.Independent directors do not act as an advocate for minority shareholders or as asource of innovative ideas

7.Lack of Shareholder’s Activities


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8.Poor Audit Report.

Major problems:

A brief discussion of the above mentioned problems in Practice Banking Industry in

Bangladesh is given bellow:

Lower Quality of Assets:

Asset quality is an important measure of the strength of banks. The ratio of non-performing

loans and advances as a share of total and advances is considered for the purpose of

analysis. In addition, the ratio of total loans and advances to total assets is utilized to

measure the extent of deployment of assets in earning assets. The most important indicator

of bank asset quality in the loan portfolio is the ratio of gross non-performing loans (NPLs)

to total loans and the ratio of net NPLs to net total loans.

Capital Inadequacy:

Capital adequacy focuses on the total position of banks' capital and the protection of

depositors and other creditors from the potential shocks of losses that a bank might incur. It

helps absorbing all possible financial risks like credit risk, market risk, operational risk,

residual risk, core risks, credit concentration risk, interest rate risk, liquidity risk, reputation

risk, settlement risk, strategic risk, environmental & climate change risk etc. Under Basel-II,

banks in Bangladesh were instructed to maintain the Minimum Capital Requirement (MCR)

at 10.0 percent of the Risk Weighted Assets (RWA) or Taka 4.0 billion as capital, whichever

is higher, with effect from July-September quarter in 2011 MCR was revised to increase the

shock resilient capacity of the bank. However, for the fourth quarter of 2011 MCR waslowered to 9.0 percent of RWA or Taka 2.0 billion, whichever is higher. Under the

Supervisory Review Process (SRP), banks are directed to maintain a level of "adequate"

capital which is higher than the minimum required capital and sufficient to cover for all

possible risks in their business. This higher level of capital for the banks is usually

determined and finalized through SRP-SREP dialogue. All the banks are not capable of

maintaining minimum capital requirement.

Low earning performance

Return on assets, return on equity and net interest income is very low in Bangladesh

banking industry.


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Surplus liquidity

The provisioning requirement increased by 32 per cent to stand at Tk 320 billion in September

end 2013, against December end ,2012 where required provision of PCBs increased to Tk 117.60

billion registering cent growth 40 per

Weak Regulatory System:

Bangladesh still follows the hybrid system which is inherited from the British administration.Therefore, weak regulatory system along with board interference with the management creates

problems in the banking industry of our country.

Weak Capital Market Role:

Capital market facilitates good governance through the production of information and

monitoring. The capital market of Bangladesh consists of two stock exchanges: Dhaka Stock

Exchange (DSE) and Chittagong Stock Exchange (CSE). Bangladesh does not have depth in its

equity market. The capital market of Bangladesh is still a weak link in forward movements for

strengthening Banking industry of our country.

Bank ownership structures are dominated by family members:

All corporate governance systems have four core principles: Fairness, accountability,

responsibility and transparency. In Bangladesh, general practice is that the corporate structure

is dominated by family members. Such practice hinders the level of fairness, accountability and

transparency.

Accounting standards and disclosure and its impacts on banking industry andmanagement practices in Bangladesh are mixed:

Following the tradition of English law, Bangladesh accounting standards (BAS) are not based

on codified law, but rely on Generally Accepted Accounting Principles (GAAP) developed by

accounting profession. So banking industry is facing problems because of the gaps between two

laws.

Inadequacy of effective risk management:

Risk is defined as potential losses or foregone profits that can be triggered by internal and

external factors. Therefore, the objectives of risk management are identification of potential


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risks in operations and transactions, in assets, liabilities, income, cost and off–balance sheet

exposures and independent measurement and assessment of such risks and taking timely and

adequate measures to manage and mitigate such risks within a risk-return framework. But In

Bangladesh maximum banks are not efficient in managing risk.

Lack of transparency and accountability:

Director interference in the daily transaction of banks is one of the main reasons for defaulted

loans. Most of the times unqualified people get credit facility due to the biasness of higher

authority of banks. And the higher authority even does not have any accountability to their

work.

Minor problems

Inadequate Bankruptcy Laws:

Bankruptcy laws and processes are inadequate in terms of provisions and not strong in terms of

enforcement in Bangladesh. In this way fairness, accountability and transparency is decreasing

day by day.

Inconsistency between Bank Companies Act, Bangladesh Accounting Standard and

Security Exchange Commission requirements:

In many cases, the Act, 1994 lacks clarity with regard to statutory requirements on disclosures

in the financial statements of listed companies.

No Market for Corporate Control:

A market for corporate control plays an important role for monitoring Banks function. But In

Bangladesh, there seems to have no market for corporate control.

Independent directors do not act as an advocate for minority

shareholders or as a source of innovative ideas:

The Companies Act, 1994 provides many rules in respect of any negligence, default, breach of

duty or trust on the part of director, manager or officer of a Bank. In the context of Bangladesh,

independent directors do not act as an advocate for minority shareholders or as a source ofinnovative ideas.


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Lack of Shareholder’s Activism:

General shareholders do not pay attention on issues of performance, business strategy, future

business plans, disclosures and processes that could give them a greater voice in the policy

decisions of a bank. Shareholders= activism is still an illusion in Bangladesh.

Poor Audit Report:

Audited financial reports are rarely reliable and free from the control of the owners. Despite

irregularities (in respect of non compliance with the applicable IASs) in the audit report, the

auditors issue unqualified audit report on the financial statements.

Possible strategies to overcome banking sector problems:

Implement Competition Policy:

Bangladesh needs to formulate a Competition Policy which will ensure a culture of good

governance to thrive. Competition policy helps bring about efficiency, reduce price distortions,

lower the risk of poor investment decisions, and promote greater accountability and

transparency in business decisions, and lead to better management.

Improve the capacity of the Boards of directors:

Directors must improve their participation in strategic planning, monitoring of internal control.

There is a need for director training, voluntary codes of conduct to expect professional

behavior. The most vital thing that can ensure good management is high standards of ethical

and personal behavior. This can only be ensured if the value system of society imposes this on

their people as the norm in every aspect of life.

Ensure the legal and regulatory framework:

Government should ensure the legal and regulatory framework which may include, among

other things: (i) strengthening disclosure requirements (ii) ensuring that regulators have the

capacity to monitor banks (iii) clarifying and strengthening the duty of directors etc.

Strengthening the Capacity of the Government:

The Securities and Exchange Commission (SEC) of Bangladesh need to be strong so that it can

devise and enforce a code for good monitoring. The Companies Act has to be applied andupdated to have consistency with Bangladesh Accounting Standards (BAS), SEC requirements


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and the Bank Companies Act. Independent Audit Committee should be made compulsory for

all listed bank companies.

Strengthening the Capacity of Public and private banks:

Public and private sector institutions should continue to raise awareness among companies,

directors, shareholders and other interested parties. To achieve the desired CG framework in

Bangladesh, a strong national commitment to CG is essential.

By creating Audit Committee of the Board :

Audit Committee will independently monitor all activities of banking operations involving

credit risks, operational risks and market risks through Internal Control & Compliance Division

of the Bank. Risk based audit plan for IC &CD will be approved by the Committee and its

implementation will be monitored on a regular basis to ensure that all risk factors are

adequately addressed and any deviation is quickly corrected to ensure sustainable operation of

banking activities.

Implementation of early warning system:

Early warning system Operation and performance of loans have to introduce to trigger early

warning system to address the loans whose performance show any deteriorating trend enabling

the Bank to grow its credit ensure higher portfolio in a sustainable way to quality and lower

risk with the ultimate objective to protect the interest of depositors and shareholders.

Credit policy will be approved by the Board:

The Board will approve the major policy guidelines, growth strategy, exposure limits for

particular sector, product, individual company and group, keeping in view regulatory

compliance, risk management strategy and industry best practice.

Efficient employees:

Banks have to hire highly efficient employees to overcome their major problems.

Data and methods of analysis:

Data Collection:

This study is based on both secondary and primary data. For this purpose, we have used the

data published in Annual reports of Bangladesh Bank and other related websites. Moreover,


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the journals, articles, reports and surveys have been referred. First we have gone through the

data published by Bangladesh Bank. Bangladesh Bank has published the data after doing

statistical analysis. So we have not done any statistical analysis. And in data we found that

banks performance is not good. So to find out the main reasons behind the banks poor

performance we have taken interview from some employees of 10 banks.

Variables:

To analyze the financial performance of banking sector different variables are included

in this study, they are as follow:

a)Deposits (D)

Deposits are considered as banks‟ main source of funding and are the lowest cost of funds.

The more deposits are transformed into loans, the higher the interest margin and profit.

Hence, deposits generally have positive impact on profitability of the banks. But if a bank

can’t transform its deposits into loans efficiently it may bring negative impact on profitability

also.

b)Capital Adequacy (C)

Capital adequacy is a measure of the financial strength of a bank, usually express as a ratio of

its shareholders‟ fund to total assets. The ratio reflects the ability of a bank to withstand the

unanticipated losses. This ratio has a positive relationship with the financial soundness of the

bank.

c) Asset Quality (A)

Asset quality is an important measure of the strength of banks. The ratio of non-performing

loans and advances as a share of total and advances is considered for the purpose of analysis. In

addition, the ratio of total loans and advances to total assets is utilized to measure the extent of

deployment of assets in earning assets.

d) Management Quality (M)

The capacity/efficiency of the management of a bank can be measured with the help of

certain ratios. To capture the possible dynamics of management efficiency, the following ratios

are considered: total loans and advances to total deposits, interest expenses to total deposits,

and operating expenses to total assets.

e)Earnings Ability (E)


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Two ratios are used to assess the earnings ability of the banks under study. The first ratio is the

net income to total assets or “ROA”. The second ratio used is interest income to total assets. The

two ratios have positive relationship with the financial performance of the bank and negative

relationship the risk of bank failure.

e)Liquidity (L)

Two ratios are employed in this study to assess the liquidity level of the banks. The first one is

total liquid assets to total assets. The second ratio is liquid assets to customers‟ deposits.

These indicators are considered according to the CAMEL.

Key Indicator Indicators

Capital Adequacy Capital to Risk Weighted Assets Ratio

Assets Quality Non-performing Loan Rate

Management soundness Expenditure-Income Ratio

Earning performance Return on Assets

Return on Equity

Net Interest IncomeLiquidity Liquid Assets/Deposit Ratio

Excess Liquidity/Deposit Ratio

Financial Indicators to Evaluate Bank Performance:

Table .

Total

Deposits by Types of Banks (Taka in Billion)

Banks Types2004 2005 2006 2007 2008 2009 2010 2011SCB‟s 41.38% 39.13% 34.46% 31.96% 29.12% 28.49% 28.08% 27.40%

DFI‟s 5.71% 5.76% 5.39% 5.38% 5.38% 5.28% 4.93% 4.75%

Banks Types2004 2005 2006 2007 2008 2009 2010 2011

SCB‟

s 544.56 608.36 641.16 686.76 745.86 869.19 1044.96 1235.65DFI‟s 75.10 89.50 100.20 115.60 137.80 161.10 183.4 214.40

PCB‟s 588.00 731.30 955.50 1150.20 1450.70 1792.40 2266.50 2787.5

FCB‟s 108.44 125.54 163.74 196.34 226.70 227.6 239.7 284.8

Total 1326.1 1554.7 1860.6 2148.90 2561.06 3050.29 3734.56 4522.35


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PCB‟s 44.68% 47.04% 51.35% 53.53% 56.64% 58.76% 60.90% 61.81%

FCB‟s 8.24% 8.07% 8.80% 9.14% 8.86% 7.47% 6.10% 6.03%

Total 100% 100% 100% 100% 100% 100% 100% 100%

Table. Market Share of Deposits by Types of Banks (percent)

Bank

s

2005 2006 2007 2008 2009 2010 2011 Average rate of

Growth

SCB‟s 11.72% 5.39% 7.11% 8.61% 16.54% 20.22% 18.25% 12.55%

DFI‟s 19.17% 11.96% 15.37% 19.20% 16.91% 13.84% 16.90% 16.19%

PCB‟s 24.37% 30.66% 20.38% 26.13% 23.55% 26.45% 22.99% 24.93%

FCB‟s 15.77% 30.43% 19.91% 15.46% 0.40% 5.32% 18.82% 15.16%


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Table . Growth of Deposits by Types of Banks (percent)

Capital to risk weighted assets ratio:

Banks Types2004 2005 2006 2007 2008 2009 2010 2011

SCB‟s 4.1 -0.4 1.1 7.96 6.9 9.0 8.9 11.7

DFI‟s 9.1 -7.5 -6.7 -5.5 -5.3 0.4 -7.3 -4.5

PCB‟s 10.3 9.1 9.8 10.6 11.4 12.1 10.1 11.5

FCB‟s 24.2 26.0 22.7 22.7 24.0 28.1 15.6 21.0

Total 8.7 5.6 6.7 9.6 10.1 11.6 9.3 11.4

Table . Capital to risk weighted assets ratio by Types of Banks (percent)


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Assets Quality:

The most important indicator of bank asset quality in the loan portfolio is the ratio of

gross non-performing loans (NPLs) to total loans and the ratio of net NPLs to net

total loans.

NPL to Total Loans Ratio:

Banks Types2004 2005 2006 2007 2008 2009 2010 2011

SCB‟s 25.3 21.4 22.9 29.9 25.4 21.4 15.7 11.3

DFI‟s 42.9 34.9 33.7 28.6 25.5 25.9 24.2 24.6

PCB‟s 8.5 5.6 5.5 5.0 4.4 3.9 3.2 2.9

FCB‟s 1.5 1.3 0.8 1.4 1.9 2.3 3.0 2.9

Total 17.6 13.6 13.2 13.2 10.8 9.2 7.3 6.1

Table . NPLs to total loans ratios by Types of Banks (percent)


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Ratio of net NPL to total loans:

Banks Types 2004 2995 2006 2007 2008 2009 2010 2011

SCB‟s 17.6 13.2 14.5 12.9 5.9 1.9 1.9 -0.34

DFI‟s 23.0 22.6 23.6 19.0 17.0 18.3 16.0 16.9

PCB‟s 3.4 1.8 1.8 1.4 .9 .5 0.0 -0.20

FCB‟s -1.5 -2.2 -2.6 -1.9 -2.0 -2.3 -1.7 -1.8

Total 9.8 7.2 7.1 5.1 2.8 1.7 1.3 0.70

Table. Ratio of net NPL to total loans by Types of Banks (percent)

Writing-of Bad Debts:

Bank

s

30 June

2004

30 June

2005

30 June

2006

30 June

2007

30 June

2008

30 June

2009

30 June

2010

30 June

2011

30 June

2012

SCB‟s 26.3 29.7 35.7 42.8 48.4 64.5 70.5 82.4 92.3

DFI‟s 17.4 27.6 28.6 30.4 31.0 31.8 31.8 32.0 32.3

PCB‟s 21.2 32.9 40.7 45.5 49.4 54.7 69.6 77.1 85.5

FCB‟s 0.9 1.1 1.5 1.6 1.7 2.0 2.1 2.4 2.9

Total 65.8 91.3 106.5 120.3 130.5 153.0 174.0 193.9 213.0


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Management Soundness:

Expenditure-Income Ratio:

Banks Types2004 2005 2006 2007 2008 2009 2010 2011

SCB‟s 102.3 101.9 100.0 100.0 89.6 75.6 80.7 62.7

DFI‟s 104.0 103.9 103.5 107.7 103.7 112.187.8 88.6

PCB‟s 87.1 89.3 90.2 88.8 88.4 72.6 67.6 71.7

FCB‟s 76.3 70.8 71.1 72.9 75.8 59.0 64.7 47.3

Total 90.9 92.2 91.4 90.4 87.9 72.6 70.8 68.6

Table . Expenditure-income ratio by type of banks (percent)


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Earning Performance:

Strong earnings and profitability profile of a bank reflect its ability to support present and

future sound operation, absorb future contingent shocks and strengthen resilience capacity.

More specifically, this determines the capacity to absorb losses by building an adequate

capital base, finance its expansion and pay adequate dividends to its shareholders. Although

there are various indicators of earning and profitability, the most representative and widely

used indicator is Return on Assets (ROA), which is supplemented by Return on Equity (ROE)

and Net Interest Margin (NIM).

Return on Assets (ROA):

Return on Assets (ROA) indicates the productivity of assets i.e. how much income is earned

from per unit of assets. According to Basel- accord, ROA should be more than 1%.

Banks Types2004 2005 2006 2007 2008 2009 2010 2011

SCB‟s -0.1 -0.1 0.0 0.0 0.7 1.0 1.1 1.3

DFI‟s -0.2 -0.1 -0.2 -0.3 -0.6 0.4 0.2 .1

PCB‟s 1.2 1.1 1.1 1.3 1.4 1.6 2.1 1.6FCB‟s 3.2 3.1 2.2 3.1 2.9 3.2 2.9 3.2

Total 0.7 0.6 0.8 0.9 1.2 1.4 1.8 1.5

Table . Return on assets (ROA) (Percent)


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Return on Equity (ROE):

Return on Equity (ROE) is another important measure of earning and profitability

determination which indicates net income after tax to total equity. The amount of profit

generation for the equity shareholders is found from the ratio. Higher value of ROE is an

indication of high productivity of equity.

Banks Types2004 2005 2006 2007 2008 2009 2010 2011

SCB‟s -5.3 -6.9 0.0 0.0 22.5 26.2 18.4 19.7

DFI‟s -2.1 -2.0 -2.0 -3.4 -6.9 -171.7-3.2 -0.9

PCB‟s 19.5 18.1 15.2 16.7 16.4 21.0 20.9 15.7

FCB‟s 22.5 18.4 21.5 20.4 17.8 22.4 17.0 16.6

Total 13.0 12.4 14.1 13.8 15.6 21.7 21.0 17.0

Table : Return on equity (ROE) (Percent)

Net Interest Income (NII):

Another important tool to indicate the earning and profitability is Net Interest Income (NII).

Net interest income is the spread between interest receipts from loans and advances and

interest paid to the depositors. The high NII means the spread between interest receipts and

paid is high.


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Net interest income by type of banks (billionTaka)

Banks Types2004 2005 2006 2007 2008 2009 2010 2011

SCB‟s -1.1 7.7 9.0 7.4 7.9 12.1 19.8 34.3

DFI‟s 1.8 1.0 1.7 1.4 1.9 1.9 6.2 4.9

PCB‟s 13.7 21.0 25.4 36.1 48.5 56.7 82.8 91.4

FCB‟s 4.2 5.6 8.2 9.9 12.6 10.7 13.0 16.1

Total 18.3 35.3 44.3 54.8 70.9 81.5 121.9 146.7

Liquidity:

Statutory liquidity reserve (SLR) varies according to the circular issued by the BangladeshBank but in an average SLR is 18.5% of total deposits including cash reserve requirement at

least 5% in Bangladesh Bank account. Three DFIs are exempted from the requirement of SLR

and 7 Islamic banks have to keep 10% SLR. Rest of all banks has to maintain the required SLR

[Bangladesh Bank].

Liquid Assets:

Banks Types2004 2005 2006 2007 2008 2009 2010 2011

SCB‟s 22.8 20.0 20.1 24.9 32.9 25.1 27.2 34.7

DFI‟s 11.2 11.2 11.9 14.2 13.7 9.6 21.3 12.3

PCB‟s 23.1 21.0 21.4 22.2 20.7 18.2 21.5 23.9


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FCB‟s 37.8 41.5 34.4 29.2 31.3 31.8 32.1 30.5

Total 23.4 21.7 21.5 23.2 24.8 20.6 23.0 26.5

Table: Liquid assets (Percent)

Excess Liquidity:

Banks Types2004 2005 2006 2007 2008 2009 2010 2011

SCB‟s 6.8 2.0 2.1 6.9 14.9 17.6 8.2 15.7

DFI‟s 4.7 6.2 3.8 5.6 4.9 7.1 2.3 2.5

PCB‟s 8.8 5.1 5.6 6.4 4.7 5.3 4.6 7.0

FCB‟s 21.9 23.6 16.4 11.2 13.3 21.8 13.2 11.8

Total 8.7 5.3 5.1 6.9 8.4 9.0 6.0 9.3

Table 14. Excess liquidity (Percent)

CAMEL Rating of All Banks:

CAMEL rating is expressed on a scale of 1 to 5 in ascending order of supervisory concern, 1

representing the best rating, while 5 indicating the worst. Any bank rated 4 or 5 i.e. Marginal

or Unsatisfactory under composite CAMEL rating is generally identified as a problem bank.

Activities of these banks are closely monitored by the BB.


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!#

On the basis of five components of CAMEL banks are rated from 2004 to 2011.

Table :

CAMEL

rating of

all Banks

in Bangladesh

As of end 2011, CAMEL rating of 2 banks was 1 or Strong; 33 banks were rated 2 or

Satisfactory; 9 banks were rated 3 or Fair; 2 were rated 4 or Marginal and 1 bank got 5 or

Unsatisfactory rating.

Problems faced in practicing Corporate Governance in Banking Industry in Bangladesh:

Sl.No Specific Problems % of respondents1 Corporate ownership structures are dominated by family

members

100%

2 Accounting standards and disclosure and impacts on CG

and management practices in Bangladesh are mixed

100%

3 Inadequate Bankruptcy Laws 60%4 Inconsistency between Companies Act, Bangladesh

Accounting Standard and SEC requirements

80%

Weak Regulatory System 100%

Weak Capital Market Role 100%

5 No Market for Corporate Control 75%

Most companies in Bangladesh are closely held and a

negative correlation exists between good Corporate

Governance and defaulting in holding annual general

meetings in due time

60%

6 Independent directors do not act as an advocate for

minority shareholders or as a source of innovative ideas

60%

7 Lack of Shareholder’s Activism 50%8 Weak Pressure Groups 75%

Rating 2004 2005 2006 2007 2008 2009 2010 2011

1 or Strong 12 13 3 6 2 3 5 2

2 or Satisfactory 15 16 31 29 28 32 32 33

3 or Fair 10 8 7 5 10 7 7 9

4 or Marginal 8 6 5 6 4 4 2 2

5 or 4 5 2 2 4 1 1 1

Total 49 48 48 48 48 48 47 47


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9 Lack of Auditor Independence 80%10 Poor Audit Report 60%

Suggestions for the removal of the problems

S.No. Specific suggestions % of

1 Code of Corporate Governance and Best Practice 80%

2 Implement Competition Policy 70%3 Improve the capacity of the Boards of directors 100%4 Ensure the legal and regulatory framework 100%5 Strengthening the Capacity of the Government 90%

6 Strengthening the Capacity of Public and private 80%

7 Institutional Capacity Building 75%8 Introduction of Good Governance Practices in State 70%

Source : field Survey

Empirical results and discussion:

In the overall report we have tried to show the performance of different types of bank in

Bangladesh by using data published from Bangladesh Bank. The study investigated the

determinants of bank profitability using annual data of Bangladeshi banks during 2004-2011.

ROA and NIM are used for the determination of bank performance in Bangladesh. There are

two reasons for using ROA as a measurement of bank profitability. First, it shows the profit

earned per unit of assets and reflects the management’s ability to utilize the bank’s financial

and investment resources to generate profit. Furthermore, bank profitability is best measured

by ROA because it is not distorted by higher equity multipliers. Here given figures show thetrend of profit measurement variables, the trend of bank specific variable and the trend of

industry specific variables of the selected banks in Bangladesh respectively. And then we have

tried to find out the main reasons behind this poor performance. This study pinpoints a

number of problems involved in the practice in banking industry in Bangladesh. These

problems are related to the composition of board, role of shareholders, annual general

meeting of the board, and role of senior management, role of auditors and position of capital

market for corporate control in Bangladesh. These problems may be overcome on the basis of

short term, medium-term & long-term initiatives. Short-term suggestions include complete

code of corporate governance & implementation of competition policy. The mid-term

suggestions mainly include strengthening disclosure requirements and fiduciary duties of


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directors and ensuring monitoring of the companies by improving the capacity of the board of

directors. Long-term suggestions include strengthening capacity of private & public sector

institutions, building institutional capacity including qualities of financial reporting.

Therefore, it is concluded that the suggestions and recommendations as put forward in thestudy need to be implemented as early as possible. The implementation does not depend only

on the banking authority, but the role of government and other agencies e.g. SEC & DCCI etc.

is also very significant in this context.

Recommendation:

In order to minimize the potentially negative impact, the banking system has to adopt anumber of measures. These are briefly noted below:

1. Banks have to create good governance to monitor daily activities of bank

• The banks should make determined efforts to increase income. They can do so by

diversifying their asset base. In this context, they should consider expansion of loan to

the un-banked or under banked sectors such as agriculture, small and medium

industries and small scale domestic traders.

• With a view to diversifying asset base as suggested above, the banks must depart from

the traditional practice of collateral-based lending. They should aggressively seek out

new borrowers with high income potentials and viable project proposals.

• Banks should also consider offering new products such as swaps, options and derivative

products.

• Banks should provide effort to recover non performing loans.

• In order to increase profitability, the banks need to focus on the volume of business and

total profit, not per unit profit. This implies that they should reduce the prevailing high

spread between deposit and lending rate, particularly by reducing the lending rate.

Some progress has been achieved in this respect, but not enough. Moreover, the banks

have considerably reduced deposit rates. This poses the risk that depositors will shift

into non-bank assets such as stocks, real estate etc. The price increases of these assets

suggest some movement in this direction.

• The banks should also look at their expenditure side to improve income-expenditureratios. In particular, salaries and perks of employees and directors and ostentatious

expenses on branch decorations should be reduced.


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• Finally, banks should strengthen their risk management and early warning systems so

that they are not caught off-guard by developments in the real economy.

• Technology has changed the expectations consumers and small businesses have of their

bank. Clients use information on the Internet to compare financial service firms. Many

more customers are comfortable with managing their money online and they expect

user-friendly tools to do so. E-mail messaging and chat interaction may now be primary

ways financial advisers communicate with clients. Companies must react to changes in

technology to keep reaching customers in the most effective ways.

1.Attract and retain clients:

Banks and financial services firms have to stand out in the crowd by offering customers

something extra.

Conclusions:

An efficient operation of banking sector enables the smooth financial resources intermediation

of an economy. Economic growth is contributed greatly by the efficiency of banking sector in

resources generation and its proper allocation. The smooth and efficient operation of bankingsector also helps to reduce risk of failure of an economy. Therefore, the performance of

banking sector is always been a source of interest for researchers to judge the economic

condition of a country. Regulators of the banking sector always monitors the performance of

the banks to ensure efficient financial system based on CAMEL ratio.

Among the entire CAMEL ratio, some important ratios which are most significant are

analyzed to judge the performance of the banking industry in Bangladesh. Among the four

categories of banks operating in Bangladesh, DFIs has been found more vulnerable compared

to the rest of three categories. CRAR, NPL to total loan, EIR all are too high and provision

maintenance ratio, ROA, ROE, liquidity ratio is too low in DFIs and this scenario also reflects

negatively in overall banking industry performance of Bangladesh. FCBs shows and PCBs

show all the positive signal of well functioning whereas SCBs also shows a trend of

improving performance. The performance of types of banks is not equal and there are some

banks which are in need of monitoring closely to enhance sound banking. It is expected that

the overall performance will be improved in near future provided that appropriate actions are

taken in some lagged areas.

http://www.openforum.com/keywords/bankinghttp://www.openforum.com/keywords/banking


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References:

https://www.americanexpress.com/us/small-business/openforum/articles/5-ways-to-

overcome-todays-challenges-in-the-financial-industry/

Bangladesh Bank Annual Report, (2004-2011), (www.bangladesh-bank.org)

http://bloguk.jobandtalent.com/tips-to-manage-stress-in-the-banking-sector

http://www.slideshare.net/sharadsrivastava12/report-risk-management-in-banks

http://www.assignmentpoint.com/business/thesis-report-on-banking-industry-in-

bangladesh.html

http://www.unnayan.org/reports/meu/December-2013/MEU%20December%202013.pdf

http://www.asaub.edu.bd/data/asaubreview/v5n1sl2.pdf

http://www.aims-bangladesh.com/special/BankingSector.pdf

http://www.reportbd.com/articles/29/1/Banking-Sector-in-Bangladesh/Page1.html

http://archive.thedailystar.net/newDesign/print_news.php?nid=154934
https://www.americanexpress.com/us/small-business/openforum/articles/5-ways-to-overcome-todays-challenges-in-the-financial-industry/https://www.americanexpress.com/us/small-business/openforum/articles/5-ways-to-overcome-todays-challenges-in-the-financial-industry/http://www.bangladesh-bank.org/http://bloguk.jobandtalent.com/tips-to-manage-stress-in-the-banking-sectorhttp://www.slideshare.net/sharadsrivastava12/report-risk-management-in-bankshttp://www.assignmentpoint.com/business/thesis-report-on-banking-industry-in-bangladesh.htmlhttp://www.assignmentpoint.com/business/thesis-report-on-banking-industry-in-bangladesh.htmlhttp://www.unnayan.org/reports/meu/December-2013/MEU%20December%202013.pdfhttp://www.asaub.edu.bd/data/asaubreview/v5n1sl2.pdfhttp://www.aims-bangladesh.com/special/BankingSector.pdfhttp://www.reportbd.com/articles/29/1/Banking-Sector-in-Bangladesh/Page1.htmlhttp://archive.thedailystar.net/newDesign/print_news.php?nid=154934https://www.americanexpress.com/us/small-business/openforum/articles/5-ways-to-overcome-todays-challenges-in-the-financial-industry/https://www.americanexpress.com/us/small-business/openforum/articles/5-ways-to-overcome-todays-challenges-in-the-financial-industry/http://www.bangladesh-bank.org/http://bloguk.jobandtalent.com/tips-to-manage-stress-in-the-banking-sectorhttp://www.slideshare.net/sharadsrivastava12/report-risk-management-in-bankshttp://www.assignmentpoint.com/business/thesis-report-on-banking-industry-in-bangladesh.htmlhttp://www.assignmentpoint.com/business/thesis-report-on-banking-industry-in-bangladesh.htmlhttp://www.unnayan.org/reports/meu/December-2013/MEU%20December%202013.pdfhttp://www.asaub.edu.bd/data/asaubreview/v5n1sl2.pdfhttp://www.aims-bangladesh.com/special/BankingSector.pdfhttp://www.reportbd.com/articles/29/1/Banking-Sector-in-Bangladesh/Page1.htmlhttp://archive.thedailystar.net/newDesign/print_news.php?nid=154934

Documents

BFM Report Final