Global Trends of Banking Services

8/3/2019 Global Trends of Banking Services

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FACTORS AFFECTING THE GLOBAL TREND OF BANK SERVICES: COMMENT ON

BANGLADESH

S. I. Nusrat A. Chaudhury

Associate Professor

Mahmud ZubayerAssistant Professor

Mamunur RashidSenior Lecturer

East West University

43 Mohakhali C/A

Dhaka 1212

Corresponding e-mail: [email protected]

Published inSoutheast University Journal of Business Studies, 4(1)

Abstract

Services are windows to reach customers and these are continuously changing with thechanging needs of the customers. Banking services contribute significantly to the

nations GDP and employment. On an average ninety percent GDP of the financial sectorin Bangladesh comes from the banking industry that is primarily result of effective

mobilization of deposit and deployment of credit in different forms. Banking job has

been treated as one of the lucrative career options with an increasing percentage of HRadded every year (BBS Survey of Labor Force, 1995-2003). However, this sector is

experiencing a substantial period of unsteadiness as the outside forces change with

respect to globalization, deregulation, merger and acquisition, universal banking

movement, technological development etc. Since banking is a service oriented globalfinancial industry, bankers need to concentrate on these factors, which reshape the

trend of service development. This report entails to find out the factors, that closely

affect the innovative development of banking services at present and those are expectedto control the pace of the service development in future, from a global perspective. Thisreview report recognizes the importance of banking service development, itsdimensions, strengths and weaknesses for Bangladesh and also identifies international

initiatives that might be applied to banking sector in Bangladesh.

Key Words: Technology, Relationship, Globalization, Banking Services.


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1.0 Introduction

Financial market transfers the fund from the surplus unit to deficit unit through an

effective intermediation mechanism using financial intermediaries i.e. banks, in the

form of accepting deposits and deploying credits. Through out the centuries of trust,bankers have successfully installed the ideas of satisfaction inside the mind of the

people which, is truly reflected by the ratio between percentage of GDP coming from thefinancial intermediation and solely from banking industry. 90% of the GDP of financialsector is contributed by the banking industry in Bangladesh (Ashraf & Howlader, 2005,

pp. 30). Employment in this field has been increasing successfully over the years from1996 to 2003, which was, 0.57% of total employment in 1996 and 0.68% in 2003 (Labor

Force Survey, Bangladesh Bureau of Statistics, 1995-96, 1999-00 & 2002-03). Gradually,because of its market oriented updated services with supported care for the target

group with a view of creating economic value, banking is now treated as an essential

industry (Rose, 2002). As the competition increases, banks are trying to be modern with

customer friendly services having more strategic view in mind for specific kind ofcustomer located in different geographic locations (Howcroft & Durkin, 2003). Through

this intermediation of fund from surplus to deficit units, banking is assisting in countrysresources allocation into productive deployment (Ashraf & Howlader, 2005, pp. 67).

Therefore this intermediation will be winning if the bankers are successful to attract the

attention of the people presenting the appropriate value to their investment. Themodern intermediation process will be differentiated on the basis of how the market

reacts to it (Santomero & Eckles, October 2000). And to make this intermediationsuccessful, bankers need to understand the factors those affect the psychology and

operational behavior of the market and its elements. That is how the importance of

global factors such as technology, deregulation, cross-pillar activity (universal banking),merger and consolidation, globalization of markets, diversity of demographics etc. come

into action.

1.1 Modern Bank Services and Its Dimensions

Banks are not dying because of its intermediation and payment services (Rose, 2002).

Rose (2002) added that modern banking creates convenience through locationalcompetitiveness and technological implications. Banking services are now so diversethat is sufficient enough to satisfy all the financial needs of the customers. All financialservices under single-roof-psychology is pressuring to change the name; commercial

banks to Universal Banks (Santomero, Eckles October 2000).

Abdullah A. Noman (2005) described the base of modern banking service developmentas the combination of three factors; (1) Financial, (2) Relationship enhancement and (3)

Market performance. Reddy (2005) analyzed the importance of modern banking

services from a social view point. He considered the social responsibility of the bankeron the top of all factors. Task Force Report on Banking sector reform, Bangladesh(1999) established a cause and affect relationship between the modern banking

services and the development and smooth operation of the banking sector in any

developing country especially for Bangladesh. As a brain of the economy, modern banksmust ensure the intrinsic and extrinsic development of the economy (Mohan, 2005).And to do this, financial services have to be modern.


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A conceptual model of dimensions of service development is shown below.

1.2 Common Bank Services and Strategy of the Bankers

Bank services are the bearer of its profitability and liquidity (Rose, 2002). Beyond the

bottom line of any business, profitability, bakers are also liable to build up the society

since it is well known as a socio-economic organization (Mohan, 2005 and Reddy,2005). Therefore the services should be developed keeping in mind that it is serving

both profitability and social responsibility functions. Bank, as an intermediary, earnsmost of the profits from loan products it offers and also earns some fees and service

charges from other fiduciary services. Deposit is the biggest source of cost. The nominaldifference between interest income and interest expense is the margin for

intermediation. As a bank manager, one must have the objective in mind to increase thismargin. So the services should be offered such a way that increases the interest income

from loans and minimizes the cost of deposit to an optimum level with an increased

customer satisfaction, and that is how it becomes the most important financialinstitution and most important among the service sector companies as well (Tore andVeronica, 1994). Statements, from Tore and Veronica (1994), Berger and Humphrey

(1992), Frexias and Rochet (1997), Alan Greenspan (2003), Barnard Barnanke (1983),Boot and Thakor (1996) and many more, are same with respect to banks responsibility

of social welfare, economic stabilization, capital management, risk management,customer financial service management and many more by fulfilling the business

bottom line. Its increasing importance can be shown by the following table (table 01)which was surveyed by Fortune Global 500 having a comparison of the 1991s and

1998s Service and Financial sector companies:

Table 01: Global Service Sector Statistics

Service sector share 1991 Service sector share 1998

All data are in % Numb

er

Reve

nue

Prof

it

Number Reven

ue

Profit

Diversified service companies 13.4 30.0 8.6 20.2 20.0 7.2

Insurance companies 4.2 5.2 15.4 10.8 10.9 10.8Transportation 5.8 7.6 -1.3 2.4 1.9 2.1

Utilities 5.8 7.6 8.7 7.6 7.3 12.2

Banks 12.0 17.3 21.6 13.6 10.9 10.9

Total for Service Sector 41.2 67.8 53.0 54.6 51.0 43.2

Source: Fortune, various editions

It also indicates the increase in proportionate coverage of financial services andpossible opportunities for the banking services to be more attractive and society

Financial Innovation(Efficiency and Cross-

pillar Product)

Marketing Magic(Customer satisfaction

and service delivery

method)

TechnologicalImplication (Reduce

cost, creation of

convenience)

Socio-Economic Value Creation

(Social Responsibility and Financing the investment of productive resources)

Diagram 01: A Conceptual Model of Service Dimensions in Banks


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oriented and profitable. What kind of deposit or loan products or any other services

banks will be providing, will be depending on many different factors. And these factorswhich affect the service development and changing the trend of services in the current

global context are our main consideration of this review research. Presently common

bank services are affected by globalization, technological advancement, educatedcustomer society with diverse financial requirement and many more (Hussain, 2004

and Ferguson, 1998).

While explaining about the type of modern banking services offered by Indian Banks,

Mr. Y. V. Reddy, the Chairman of Reserve Bank of India in a Seminar in 2005 argued thatthe future bank services will not be limited to specific groups or locality. He added that

bank services will form a retail-wholesale niche combination and services will beoffered not only on the basis of customer demographics but also on an open regulatory

framework basis. He suggested the managers to add value to the economy not only by

offering commercial services but also by being social benefactor considering both

globalization and financial infrastructure and superstructure available locally andinternationally. He hopes that the development of technology through out India will be

available so that all types of people get the chance to get into the biggest financialstream.

Among different deposit services, saving deposits, current or demand deposits, time orfixed deposits are in the top of the list. Recent examples show that bankers are

concentrating on niche collection of deposit from small individuals or shop keepers.Banks are pretending to collect fund through DPS, Student Account, Super Market

Savings, Youth Saving Program, Old Age Saving Scheme, Household Saving Scheme etc.

Everyday newer names are added to the types of deposits. But while making depositportfolio decision, banks make a trade off between the stability and cost (Ashraf and

Howlader, 2005).

Banks loan products are created out of different tastes. Different types of customers areentertained with different kinds of loan services. From a big corporate client to a single

individual, all are captured through modern bank loan services network. The recent

trend includes loans for SME, Micro Credit for villagers, Retail loans like ConsumerCredit Schemes, technological loans like Credit Cards and many others. But primarilybankers started with long term Industrial Loans in most of the countries with a view todevelop the economy or a specific sector. Bankers ultimately choose customer on the

basis of (1) ability and (2) willingness to pay loan installments (Peter S. Rose, 2002).

2.0 Research Questions

This review research intends to search the answer of the following questions:

1. What global, regional, local trends are affecting the banking services?2. What are the strengths, weaknesses of, opportunities for and threats to the

development of effective banking services in Bangladesh?

3. What are the initiatives might be taken by the concerned authorities to create aroom for innovative service development?

2.1 Methodology: Data Collection and Analysis


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The review involved four stages of data collection and analysis procedure indicated by

Financial Services Cluster Review, Toronto, Canada (February 2001).

Stage 1: Reviewing literature available from academic, industry, and seminars, special

speeches given by Governors of Central banks and other public sources in either printedor in electronic format including different web issues.

Stage 2: Interviewing the industry experts including academicians, bankers andindustry representatives. The sample size of the interviewees, which was selected

conveniently, was 15 with a response success rate of 93% (14 successful interviews outof 15). Interview was taken either by written questionnaire format by sending the

questionnaire to the experts by e-mail (80% approximately) or rest (20%) on telephoneconversation.

Stage 3: Analysis of the background study to search for the factors affecting the banking

service creation and development of banking services and offering them to thecustomers, and also to find strength, weakness of, opportunity for and threats to the

banking sector of Bangladesh.

Stage 4: Identifying the possible initiatives that might be taken up by Bangladesh

Government to develop banking sector to create innovative banking services. Acomparative study is also conducted on the initiatives taken by authorities in other

countries and cities to develop their financial service cluster development. Lessons forBangladesh have been taken from that comparative study.

3.0 Factors Affecting Bank Service Development: Background Study

3.1 Customer Relationship, Competition and Socio-economic Values:

Berger and Humprey, (1992); Frexias and Rochet, (1997) described bank as a multiinput and output financial firm where the main objective is to give better services to the

customers. They argued that the modern approach seeks to keep better relationship

with customer by providing quality bank services. Banks are among the most importantfinancial service providing companies in any economy. Therefore, banking servicesmust be rendered to the best interest of the economy. Y.V. Reddy (2005) highlightedthis perspective of banking services from a social view point brining in the socio-

economical responsibilities in terms of capital mobilization, poverty reduction, humanresource development etc.

As the market is becoming increasingly competitive, bankers are now directed to

ascertain bank-client relationship for better stable growth of profitability. It is described

by many background studies that relationship successfully increases the value of thecompany through repeat customer mechanism and successful customer retentionsystem (Mohan, 2005; TFSCR, 2001; Reddy, 2004, Tore and Veronica, 1994; Santomero

and Eckles, 2000). Relationship differentiates the bank services and separates the bank

value from the competitors. Financial sector reform taskforce report Bangladesh (1999)described the importance of competition from relationship perspective whileconsidering new service development in banks. It suggested the bankers need to becompetent to handle competition as it is an important normal market phenomenon.


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Practice of basic banking, especially Indias strategy, to cover maximum population fromdiversified geographical location and income groups, has started now. Central banks in

developing countries are now pressuring the commercial banks to strengthen their base

of banking in the rural areas (Mohan, 2005). Therefore the selection of thirst sector ispressuring the bankers to shape their way of thinking about service development.

3.2 Technology:

One of the major requirements to fulfill the social responsibility is to cover the widerange of population scattered in different locations through banking services, so that

not only city areas but also the rear rural villages can be also taken under greaterfinancial development stream. Technology can make that possible with ICT facilities to

bank branches connected to Global ICT Network. Technology becomes important not

only for covering huge population, it is also important as a less costly channel of

distribution of financial services which has impact on profitability as well (Santomeroand Eckles, 2000; Barnanke, 1983; Moriotti, 1993; Mendis, 2004; TFSCR*, 2001).

Recent development in e-innovations and financial technologies have advanced the

conventional thinking of the banking industry onto modern, extrovert, globalized

version of banking. With the use of massive IT developments, bankers are now efficientto handle complex data management, faster client service, customizing relationship,

strengthening services to newer customer base and furthermore to eliminate paperworks, better scheduling of logistical facilities for overall setting up of competitive

advantages (Fukui, 2005; Udeshi, 2003). Most of channels, such as branches, call

centers, ATMs, Credit and Debit Cards etc., through which bankers render their servicesto customers are technology supported, therefore technology becomes one of the

biggest indicators of how services will be formed and what is the destination of the bank

(M2 Communication survey, 2003). Review of the financial technology development can

be cited from Santomero and Eckles (2000) explanations: Examples of potential gainsfrom financial technology development include physical branch network, infrastructure

software, electronic distribution system where marginal costs are negligible, and some

niche processing businesses in which value is a dominant success factor. Greatercustomer knowledge means lower monitoring cost and information can be betterhandled by technology than any other mechanisms.

3.3 Idea of Risk Management Strategy:

Berger and Humprey, (1992); Frexias and Rochet, (1997); Ferguson (1998) and Reddy(2005) tinted risk management perspective important while introducing new services.

The summary of their reports shows that one of the major aspects in service

development is to create and offer service of such kind that fulfills the customer demandand helps to reduce risk of different types. They also pointed out that the prerequisite ofthis perspective that bank must understand its target customer very carefully.

Introduction of derivative services are the result of thinking in easy risk management

solution in finance (Santomero and Eckles, 2000).

3.4 Deregulation:


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Y.V. Reddy (2005) described deregulation as one of the major factors that is helping to

expand Indias banking sector. He said that too-much of regulations were limiting thegrowth and restricting the choice of the customers (2005). Since banking is a customer

oriented business, customers must be given the regulatory support to think about the

better way of living. As a result, deregulation was on the top of the list of expectation. Asthe governments are reducing their level of control on the financial activities, the size,

shape and the areas of banking activities are changing all over the world.

3.5 Universal Banking and the Idea of Cross-pillar Activity:

The idea of convergence or cross pillar activity was primarily highly practiced in

Germany with the introduction of Universal banking in which under one single roof, allthe banking needs are taken care of. Cross pillar strategies allow a company to gain

economies of scale, to access a wider market, cross-sell and deliver a wider range of

products and even enhance product innovation capabilities (TFSCR, 2001). Shamshad

Akhter, Governor of State bank of Pakistan (2006) described the mechanism ofuniversal banking and its importance in banking in terms of competition in banking

services and also from building relationship with customer base. The report waspresented in a seminar which aggregates the benefits of Universal banking with proven

priority to customer demand in banking. Mergers and acquisitions are taking place at an

astounding rate within industries, which comprise the banking sector as well. The caseof Standard Chartered Bank and ANZ Grindlays is one of the perfect examples for many

South-Asian bankers, which opens the opportunity for providing wide range ofcustomer friendly services considering the diversity of customers from two different

banks.

3.6 Globalization:

The top 8 banks in the world are each worth as much or more than all of the Canadian

Bank as a whole (Merill Lynch, 2000). Through consolidation and mergers in differentformats, banking industry is now a global financial village. Even without setting up of

subsidiaries in different countries, bankers are managing the international trades,

through LC mechanisms by having thousands of foreign correspondents and agents.Adoption of new technology has made the whole world close to each other and this easyaccess to global financial services increases the demand of the customer for better andnewer services to fulfill their expectations. Companies with inadequate resource are

forming strategic alliances with local big companies in different countries, which givesthem the opportunity of entering into new market. This idea of getting onto one-single-

pie is creating newer angles in service developments in banking services. That is howthe economic integration changes the way the banking services should be

developed.Toronto Financial Service Cluster Review (2001) describes globalization as it

has let to a highly interdependent international market vulnerable to serious globalfinancial ripple effects. The review says that the availability of information for virtually24hrs everyday is creating further threat among international markets and the

deregulation along with regional cooperative movements have further opened up the

door of creative and challenging financial needs of the customers. Now customer wantsa globalized financial product rather than banking services which merely take care ofdeposit interest payment or a convenience through loan facility.


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3.7 Changes in Demographics and Customer Education:

People always like to change to better options and as they are changing with their

demands, the supplier will also have to change their strategies. Income-expense pattern,

CPI, GNI etc have been changing rapidly worldwide. This affects the saving patter of thepeople and also affects the ability to invest in productive resources as well. The age

limit, population study, mortality rate have been different in different geographiclocations, banking services including saving plans, insurance programs are becomingdifferent for catering to the need of the customers.

4.0 Analysis and Review

4.1 (Table 02): Ranking of the Top 10 Factors that are Relevant to Development of

Bank Services in Bangladesh: Industry Response

Rank Factors Response*1 Important Issues

1 Technology 100Reduce cost, increase coverage & profit,

financial engineering.2 Education 96

Access to internet, newspaper, seminars,advertisements, satellite

3Customer

Demography93

Income-expense ratio, CPI, Mortality rate

4

Competition,

Niche, Religiousimportance

92

Islamic branches, Services forProfessional, services categorization

according to ages (Old, Young, studentaccounts), SME

5 Relationship 85Client relationship, customer servicedepartment, Post Service Relationship

6 Retail-WholesaleFormation

84

Corporate service, Retail banking,

Corporate Salary Account, PriorityBanking, SME, Syndicated Loan.

7Cross PillarActivity

75Insurance, Leasing, Underwriting.

8 Deregulation 70

Flexibility of regulations in credit

disbursement and designing depositproducts.

9

SocialResponsibility &

development

issues

62

City beautification project, studentscholarship, Lower rate Loan for women,

10 Area wiseclassification

57% Rural vs. urban banking, micro credit tovillagers, Infrastructure development

*1 Total percentage is more than 100 because of multiple answers chosen by the

respondents.

The above ranking has been done on the basis of simple weighted average percentageopinion of the industry experts, high level bank officials and academicians (total sample

number was 14). Technology has been selected as the most important and powerfulfactor that will obviously change the way of service development in future. Please note


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that there were other factors identified by the interviewees, but only the top ten factors

have been identified for this report for further analysis. On the basis of the factorsselected and important issues related to every factor, analysis of SWOT is shown in the

following part for Bangladesh. [see Table: 2]

5.2 Findings: SWOT Analysis for Bangladesh

5.2.1 Technology:

Bangladesh Institute of Bank Management (BIBM) in its survey on ICT in Bank Branches(2001) shows that only 19% of the Nationalized Commercial banks and 38% of the

Private Commercial Banks have backbone of ICT facilities. Opposite to this, ForeignCommercial banks are 100% supported with ICT infrastructure. Latest technology

initiatives in Bangladesh include; installment of huge capacity software and hardware

for overall processing of banking activities, Automatic Teller Machine (ATM), Credit and

Debit Card, global online fund transfer, Database management, anyplace-anytimeconnectivity, any-branch banking etc. Bangladesh started its journey toward upgraded

version of technological infrastructural development through submarine cable, eventhough it is too late and it will take another few years. VOIP (Voice Over Internet

Protocol) has been unleashed, but without specific direction, in a seminar by the last

Govt. Only city headquarters like Dhaka, Chittagong, Sylhet are currently under strongIT control. Unfortunately a big area is uncovered. Due to the lack of IT infrastructure,

much of upgraded and less costly banking solutions are not present to the rural andsub-urban areas of the country. Absence of IT facilities is demotivating bankers to open

branches in the rural areas because most of the modern services could not be provided

and bank will not be able to cover its economies of scale. The opportunity is that iftechnology coverage is there, mass people will be under banking coverage and reaching

them with modern banking services will be possible. So, problem for banking

technology in Bangladesh is basically limitation of IT infrastructure.

5.2.2 Education:

Educated people are rational investors (Mohan, 2005). As the countrys educationstructure and standard start to develop, people have the access to modern learning.Education Watch Report, Bangladesh (2004) says that approximately 50% of theBangladeshis can write their name. Though there is no clear record of what is the actual

level of properly educated people and percentage of population belongs to that group, itis clear that country education status is overstated. Even though the Govt. has the

highest budgetary allocation for education, recent government decisions regardingMadrasha Education and Ekmukhi Shikha have noted significant protest. But both

qualitative and quantitative changes have been observed in the education industries in

the recent past. The credit goes to the fifty private universities, thousands ofkindergartens, village schools established by NGOs, local and international trainingprograms etc. The people are also learning about new generation banking cultures from

satellite channels and Internet facilities and looking for such banking services to fulfill

their needs. Bankers are also changing their strategies to introduce services accordingto the need and demand of the customers. Education is significantly changing thedemographics of the people like the income range and therefore the buying capacity ofthe people. Education changes peoples attitude towards banking services. The middle


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class family is the future of banking sector of Bangladesh, which is educated and live a

financially solvent life. This group is fairly increasing in this country. One pertinentquestion in this connection is that whether we have enough facility to train and educate

our banking professionals. Bangladesh Institute of Bank Management (BIBM) is the

most reputed professional institute of the country where banking graduates are bornbut in a limited number. This organization organizes most of the implicative training

programs. In the year of 2004, a new department was created in the name of TheDepartment of Banking under the faculty of Business of Studies of the University ofDhaka. Some private universities are also coming up with their Master of Bank

Management (MBM) programs, but the quality is questionable. So, better educationalinfrastructure, not only for the customers but also for the bankers, might change the

way of bankers thinking towards customers demands.

5.2.3 Customer Demography:

Major attributes of customer demography are listed below:1. Due to a high consumption to savings ratio, supply of fund to bank through

different deposit products has reduced.2. Remittance income was one of the biggest incomes in the village areas and it hasbeen transferred to local receiver without government registration mostly

through Hundi system. Now, due to strict regulations and absence of banks inremittance-receiving areas, people are coming to city areas, mostly in Dhaka, and

opening bank account with any bank. The village women or housewives whoused to receive the remittance, has been instructed by the senders (husband in

most cases) of remittance to come to city headquarters for better banking and

education facilities.By these processes, demands are shifting. Banking services need to be designed to meet

up these changing demands. And mostly because of these we are observing most of the

banks opening branches in Dhaka, Chittagong and Sylhet.

5.2.4 Competitive Pressure and Identification of Niche:

There are near about fifty schedule banks working in Bangladesh with another fifteen(approximately) insurance and leasing companies. Most of the financial and non-financial institutions are privately owned and paid great attention towards sustainableservice development. This is a perfectly competitive market where private commercial

banks have the highest stake in loan disbursement, which grows to 43% in 2004 from30% in the year 2000. In a perfectly competitive financial market, leaders are chosen on

the basis of their effective deployment of resources and efficient ways of satisfyingcustomers (Tore and Veronica, 2004). Nationalized commercial banks are loosing loan

market because of ignorance of effective customer management where their share of

loan reduced to 39% in the year 2004 from 48% in the year 2000. Foreign Commercialbanks have shown their efficient loan management and grabbed a substantialpercentage which rose to 7% in 2004 from 5% in the year 2000. Giants nationalized

commercial banks are facing competition from deposit collection perspective. Due to

lack of customer understanding and inefficient deposit management, their share indeposit reduced by over 20% from the year 2000 to year 2004. Having the same asadvantage, private commercial banks did successfully increase their deposit collectionfrom 31% in the year 2000 to 43% in 2004. One of the most important and strategic


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areas banks have significant improvement undertaken is the identification of new

niches. There are numerous examples available like loan for professionals, Micro credit,Islamic banking branches, students account, Female banking, Home banking, Priority

banking and many more. Huge inside competition has forced the bankers to be

innovative. Nationalized commercial banks did not build their service strategiesconsidering the competitive risk. Mohan (2005) described competition by relating it to

the customers opportunity to choose better services. Therefore higher the competitionmeans higher propensity to switch banks. To be alive in the competition, bankers mustredesign their ideas to attract new customers.

5.2.5 Relationship:

Most of the private banks and all the foreign banks in Bangladesh have customer service

division at individual working units either in branch or in any particular department.

Bankers have successfully identified the importance of customer relationship

management. Modern banking is different from traditional banking as it talks aboutcustomer satisfaction and welcomes the customer to repurchase the service again (Tore

and Veronica, 2004). The strongest side of the foreign banks in Bangladesh is that theyhave successfully established the ideas of customer management inside the mind of the

people. While comparing with other banks, they first highlight their ability to create

satisfaction, because if the customer is satisfied they will bring new customers andprofit as well. Therefore, they are bringing in banking near to customer by offering

services in many forms like ATM, phone banking, e-banking and even mobile banking.The ideology in this regard is that customers should not be waiting for the service;

rather services should be waiting for the customers to be knocked. Unfortunately this

real truth has been absent with nationalized commercial banks. As a result, they areloosing market to private and foreign commercial banks.

5.2.6 Retail-wholesale formation:

The Indian experience of bank services shows that their services have been divided into

retail (mass customer) and wholesale (corporate) services. As Reddy (2005), Fukui

(2005) described the importance of retail financial services that it can cover wide rangeof services and population. They also supported wholesale financial services forcorporate needs, where corporate services help to develop countrys overall resourceallocation. Not many banks in Bangladesh, except a few private and the foreign banks,

are allocating substantial amount of resources to various areas of retail bankingservices. Fukui (2005) also pointed out two important sides of retail banking services as

he explained that (1) retail banking services can strengthen profitability and (2) it canreduce non-performing loans. For examples, Brac Bank, Eastern Bank, Dhaka Bank,

Prime Bank, Standard Chartered Bank, HSBC Bank are molding their service strategies

according to the changing retail-wholesale formation of the country. Therefore, lionshare of household deposit and personal loans services are offered and grabbed bythese banks. On the other hand, strong relationship, with corporate bodies, is enabling

these banks to clutch substantial amount of wholesale loans in the way of syndication

and deposit accounts in the way of salary accounts etc. But still majority of the banksare not aware of the power of retail-wholesale formation of banking services, which isexpected to dominate the banking service industry in the coming decades.


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5.2.7 Cross Pillar Activity:

Cross Pillar activity is a special kind of services by modern banks where the banks

engage into serving different kinds of customers at a time such as the acceptance of

deposit, giving loans, opening insurance account for customers, arranging leasingfacility etc. The area of cross-pillar activity is very limited in Bangladesh. At present

insurance companies, leasing companies and merchant banks handle most of theindividual non-bank financial activities. Bankers are also developing these activities inlimited scale. For an example, most of the banks, those offer credit card facilities, give an

option to their customers to buy some insurance policies as well. Corporate clients,having salary account with any bank, might ask for a lease to purchase car or any other

fixed assets. Banks work as an underwriter, in most of the cases which is syndicatedunderwriting, for their clients by offering share in the market. If cross pillar activity

increases, diversification of services will be possible and as a result profitability will

increase in the form of fees earning (Banking Reform Committee Report, Bangladesh,

1999). It was a question to one banker, why they are not starting universal banking?The answer was like the following: Are you nuts? We are having problem with normal

business, how can we start abnormal business.

Bangladesh bank also does not have any specific direction regarding cross pillar activity.

However, Banking Reform Committee suggested the Govt. to recommend the banks tostart cross pillar activities in a limited format as a start up with a view to diversify the

income base (Banking Reform Committee Report, Bangladesh, 1999). One of the majorreasons behind not investing much in capital market is that the capital market in

Bangladesh is yet unstructured.

5.2.8 Deregulation:

Deregulation opens the place for competition (Reddy, 2005). Bangladesh government

has started the decomposition process not from a long ago. Since banking is a marketoriented business, the quality of the bank should be judged by the customers. Therefore

banks have been given legitimate power in every country to create deposit and loan

products to attract customers. In Bangladesh, central bank still controls major decisionsregarding capital control and reserve requirement. Central bank controls popular issueslike the SLR requirement, capital requirement, maximum loan capacity requirement etc.Now bankers can change their target market and can reshape their service policies as

well. Likewise, Govt.s decision regarding tax on house owned might influence houseconstruction loan, regulation on investment tax credit might reduce savings in bank etc.

Bankers must be careful about these changes for future.

5.2.9 Social Responsibility and Development Issues:

Bank is a socially responsible organization and in Bangladesh for last few years, veryfew banks could successfully clarify the theme of a perfectly socially responsive attitude.

Social responsibility controls banks profitability in short-run but it helps to develop the

theme of ethics and builds the image of care inside the society. It develops loyalty of thecustomers to the banks. Both local and multinational banks in Bangladesh are offeringscholarship programs for the poor but meritorious students, taking the responsibility ofcity beautification project from municipal authority, donating different hospitals,


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financing social awareness programs against AIDS, Dowry, Acid Attack etc. Banks are

also financing women in the village and city areas for self development by providingloans with low rate of interest. In the process of our conversation, one of our

interviewees was a Branch Manager of a Multinational Bank. He told us about the

impact of social responsibility on services development. In his opinion the sense forsocial responsibility is not a regulatory requirement but its a social initiative to attract

stable customer base. A bank just cannot be run on the basis of its social responsibility,it must seek profitability. Therefore, the tough job is to introduce services that generatestable profit and also create social awareness.

5.2.10 Area Wise Classification: Rural vs. Urban Concentration:

As the demands are different in different areas of bank operation i.e. rural or urban,

banking services must be also catering to the specific needs of the customers. One of the

biggest banks in Bangladesh, Sonali Bank, was established just after the liberation with

a view to finance Jute cultivation in the rural areas (Ashraf & Howlader, 2005). Anotherthree big banks, Rupali Bank, Agrani Bank and Janata Bank, were also established and

taken under close government supervision to develop rural Bangladesh. All the servicesin these banks are mostly catered to the needs of the rural areas. Commonly known as

Nationalized Commercial Banks (NCBs), these four banks, hold maximum branch

coverage in the rural and sub-urban areas, which was on an average 63% over the years2000 to 2004, whereas private commercial banks have average 25% of their branches

in the said areas. Four very famous development financial institutions namelyBangladesh Krishi Bank, Bangladesh Shilpa Bank, Rajshahi Krishi Unnayan Bank,

Bangladesh Shilpa Rin Shangstha with newly added one, BASIC (Bank for Small

Industries and Commerce), have lion percentage of the rural banking branches thoseare mainly categorized for their special development activities in agriculture, rural

trade, small business finance, remittance collection etc. No foreign banks have branches

in the rural areas, where as only Standard Chartered Bank has branch in Bogra, which

was established to finance the intra-regional trade zone activities in Bogra, one of thebiggest business centers in the northern part of Bangladesh.

Unfortunately, due to inefficient target market selection, lack of central governance,geographical diversity, shifting in demographics and low infrastructural development;rural banking has not been a successful one. Despite the doubtful success, few banks arenow opening branches in the rural areas, mainly in the headquarters; those are of great

financial importance either from remittance perspective or from trade related financingopportunities. The above limitation of the rural banking is absent in urban or city area

banking. Banks start its business by opening a branch in the famous areas of Dhaka,Chittagong and Sylhet. Since the type of customers are different in city and urban areas,

different types of business opportunities are available and service distribution methods

are different; banking services and planning must be different. This factor has beenchosen as the least important factor by most of the interviewees, since most of thesebanks do not have branches in the rural areas. But they notified that these might be

serious mistake if bankers ignore this factor for a longer period of time. Some recent

initiative includes opening branches in the sub-urban areas, mainly in the district headquarters, by the private banks.

5.3 Summary of SWOT for Bangladesh


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Strength

1. Labor pool2. Private universities3. Private bank management initiatives

Weakness

1. Limited technological infrastructure.2. Lack of monitoring of financial

activities through a legal framework.3. Managerial inefficiency of

understanding niche and offeringappropriate services.

4. Lack of understanding of customerrelationship.

5. Lack of proper linkage between supplyand demand of financial services.

6. Inefficient capital market.7. Default culture and asymmetric

information.

Opportunities

1. Changing nature of customer educationand awareness, employee training etc.2. Retail financial services are becomingless risky and profitable

3. Cross-pillar activity can add morevalue.

4. Growth of employment in home andabroad is insignificant.

Threats1. Income disequilibrium.2. Higher migration rate to city areas and

limited services to rural areas.3. Instable political condition.4. No planning for service export.

The above points show the importance of three distinctive fields given at the beginning

of the report; technology, marketing and finance. A banker must have to use the ideas ofnew technological advancement to create and deliver new services at lowest possible cost,

which ensures maximum financial benefit with respect to socio-economical advancement

by expanding stable relationship with the customers.

5.4 Findings: Existing Initiatives

Different initiatives have been taken to strengthen the banking services industry in

different parts of the world. In some countries like the USA or the UK, the bankingservices industry has been divided in different clusters by different geographical

locations. All the areas have their own merits and demerits in offering effective bankingservices. In the following part, some of these initiatives have been discussed briefly.

5.4.1 Summary of Local Initiatives:

SL Area Initiatives

1 New York Tax rebates and rent reductions for bank offices, quality ofpublic safety, promotional activities by EconomicDevelopment Corporations, labor force training etc.

2 Stamford,Connecticut

Tax credit to banks under Enterprise Zone Program, lowrents for financial services firm etc.

3 London, UK Promotion by British Invisibles (BI) to support financial

services industry, alleviating regulatory barriers,


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increasing awareness, statistical research publications, a

single central authority maintains the quality of services

etc.

4 Leeds, UK Leeds Financial Services Initiatives (LFSI) promotes

financial service activities, Leeds Training and Enterprise

Council trains the labor force etc.

5 Frankfurt, Germany Excessive branding influence, Finanplatz promotesGermany as a financial services headquarter of Europe,www.bankfrut.de provides instant information on services

development and coverage etc.

6 Toronto, Canada Economic Development Strategy establishes synergies offinancial services with other related institutions, strategic

alliance to promote Torontos Financial Service Industry,

searching and developing local talents, awareness buildingprograms, competitive advantage through BusinessSustainable Development Method etc.

5.4.2 Initiatives in Bangladesh: Financial Sector Reform

Unlike the above countries or areas, there was no successful attempt taken by the

Government of Bangladesh to strengthen the service development of the banking

industry. Several committees have been formed, but most of the recommendationscould not be implemented. Banking Reform Committee (1996), Financial SectorAdjustment Credit (1990), Financial Sector Reform Program (mid 1990s), National

Commission on Money Banking and Credit (1986), Structural Adjustment ParticipatoryReview Initiative (2000), CPD Task Force on Financial Sector Reform (2001) wereformed in different time period with different motives under Government and private

initiatives. Some of the recommendations of these committees are listed below:

1. Reform of NCBs and DFIs to reduce Non Performing Loans, so that rate ofinterest on loan can be reduced (BRC Report, 1999 & NCMBC, 1986).

2. Establishing strong legal framework with clear-cut guidelines for the bankersand more intensified supervisory system for banks (CPD Task Force Report,

2001).

3. Strengthening the capital market (FSAC World Bank, 1990).4. Establishing a room for the priority sectors (FSAC World Bank, 1990).5. Stopping illegal activities of trade unions in banking sector (CPD Task Force

Report, 2001).

6. Paying more attention to develop human resources and establishing necessaryatmosphere for ICT use in banking services (CPD Task Force Report, 2001).

7. Creating an environment of macroeconomic stability, political commitment andnon-interference of the Govt. and vested groups (SAPRI Study, 2000).The above measures and guidelines are necessary for a developing banking industry.

Along with these preliminary issues, regulators should also take initiatives to developbanking services and strengthening these in such way that satisfies the customersdemand, brings stability and competition in banking industry.

5.4.3 Latest Status of the Financial Service Development in Bangladesh


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Two important reform projects have been shut down by political government. There is

no new direction initiated by government on this issue formally. However, privatesector banks have been trying to develop their own service quality. The initiatives take

in this regard are more or less market driven and highly competitive. Nevertheless, the

initiative should be integrative from and within the financial system. Establishing aquality financial service sector is the responsibility of banks, stock market authorities,

legislators like Ministry of Finance and central bank. At present, most of the privatebanks have web information and communication facilities to render better services totheir customers. They consider market analysis, shifts in demand and economical

viability before introducing new services. But discriminations are also present. Only avery few private banks have their sufficient branches in rural areas. Technology is

vastly absent in rural areas. Moreover, a very recent case of insecurity regarding thetheft of private bank, depositors are highly disheartened. This would hurt the service

development in commercial banks.

On the top of all, government of Bangladesh should quickly consider a complete legalframework for financial service development. Issues are protection of the customer

rights, education and training of the bankers and investors, investment and research infinancial services development etc are pertinent.

6.0 Concluding Remarks

To develop and sustain a strong banking service sector, individual banks, Central Bankof Bangladesh, Securities and Exchange Commission, Ministry of Finance and other

concerned must be working together to achieve a regular, step-by-step and time driven

goal. Following initiatives can be suggested on the basis of the background study,industry responses and existing countrywide initiatives.

1. A best-effort committee can be formed having an alliance of the bankers, regulators,industry leaders and researchers. Prime responsibilities of this committee mightinclude reviewing the quality of bank services on a regular basis and establishing

Bangladesh as one of the promising areas in the South Asia for business and

investment. It should also be responsible for finding and developing CompetitiveFinancial Advantage (CFA) for Bangladesh.

2. Establish effective rules of capital market so that interest of the investors is reflectedand major companies of home and abroad become interested to participate.

3. Quality higher education must be ensured through effective and sustainable policies.Every institution, within the above alliance, must have their own training, research

and development center and must be organizing local and international workshops

and conferences to build human capital. Educational institutes might come up withinnovative quizzes or workshops where the students will be assignedresponsibilities to initiate services and to sell those to mock customers. Such

creative efforts on the part of the educational institution should be promoted and

financially supported by the banking industry.

4. National ICT coverage must be ensured within the shortest possible time at anaffordable cost.


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5. Political interference in the banking industry should be stopped for putting theinterest of the country ahead of self interest.

6. A Service Development Division (SDD) can be formed separately or it can beworking as a subdivision under the Central Research Cell (CRC) of the banks to

ensure creative identification of the banking products rather than just copy themarket trend. Banks with wide coverage might open SDD with each of the branchesor centrally for each of the departments like deposit, credit and other services.


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Documents

Global Trends of Banking Services