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Topic: Basic Concepts

institutions & Bank


Course No- PA 513

Submitted by Azharul Haider Provat

Roll no - 86


Financial Institutions:
A financial institution (FI) is an establishment that focuses on dealing with
financial transactions, such as investments, loans and deposits.
Conventionally, financial institutions are composed of organizations such as
banks, trust companies, insurance companies and investment dealers.
Financial Institutions can be divided broadly into two categories:

Non-Banking financial Institutions


Non banking financial institution:

Non-banking financial institutions are the financial institutions which are not
banks. These institutions cannot perform all functions of banks, which get
license to operate under Financial Institution Act, 1993 are termed as Nonbanking financial institutions and controlled by Bangladesh Bank. Now, 31
NFIs are operating in Bangladesh while the maiden one was established in
1981. Out of the total, 2 is fully government owned, 1 is the subsidiary of a
SOCB, 13 were initiated by private domestic initiative and 15 were initiated
by joint venture initiative. Major sources of funds of FIs are Term Deposit (at
least six months tenure), Credit Facility from Banks and other FIs, Call Money
as well as Bond and Securitization.
The major difference between banks and FIs are as follows:

NFIs cannot issue cheques, pay-orders or demand drafts.

NFIs cannot receive demand deposits,

NFIs cannot be involved in foreign exchange financing,

NFIs can conduct their business operations with diversified financing

modes like syndicated financing, bridge financing, lease financing,
securitization instruments, private placement of equity etc.

Examples of Non-banking financial institutions:

Insurance company
Mortgage company
Securities Broker
Thrift Institution

A bank is a financial institution licensed as a receiver of deposits. In other
an establishment, authorized by
a government to
accept deposits, pay interest,
clear checks,
make loans, act as
an intermediary in financial
and provide other financial
services to its customers.

Etymology of the bank

The word bank was borrowed in Middle English from Middle French banque,
from Old Italian banca, meaning "table", from Old High German banc,
bank "bench, counter". Benches were used as makeshift desks or exchange
counters during the Renaissance by Jewish Florentine bankers, who used to
make their transactions atop desks covered by green table cloths.

History of Banking:
Banking begins with the first prototype banks of merchants of the ancient
world, which made grain loans to farmers and traders who carried goods
between cities. This began around 2000 BC in Assyria and Babylonia. Later,
in ancient Greece and during the Roman Empire, lenders based in temples
accepted deposits and changed money. Archaeology from this period
in ancient China and India also shows evidence of money lending activity.
The origins of modern banking can be traced to medieval and
early Renaissance Italy,
like Florence,Lucca, Siena, Venice and Genoa. The Bardi and Peruzzi families
dominated banking in 14th-century Florence, establishing branches in many
other parts of Europe. One of the most famous Italian banks was the Medici
Bank, set up by Giovanni di Bicci de' Medici in 1397. The earliest known state
deposit bank, Banco di San Giorgio (Bank of St. George), was founded in
1407 at Genoa, Italy.
Modern banking practices, including fractional reserve banking and the issue
of banknotes, emerged in the 17th and 18th centuries. Merchants started to
store their gold with the goldsmiths of London, who possessed private vaults,
and charged a fee for that service. In exchange for each deposit of precious
metal, the goldsmiths issued receipts certifying the quantity and purity of the
metal they held as a bailee; these receipts could not be assigned, only the
original depositor could collect the stored goods.

History of Banking sector in Bangladesh:

Bangladesh Bank: Pursuant to Bangladesh Bank Order, 1972 the
Government of Bangladesh reorganized the Dhaka branch of the State Bank
of Pakistan as the central bank of the country, and named it Bangladesh
Bank with retrospective effect from 16 December 1971.
Banks : After the independence, banking industry in Bangladesh started its
journey with 6 nationalized commercialized banks, 2 State owned specialized
banks and 3 Foreign Banks. In the 1980s banking industry achieved
significant expansion with the entrance of private banks. Now, banks in
Bangladesh are primarily of two types:
Scheduled Banks: The banks which get license to operate under Bank
Company Act, 1991 (Amended in 2003) are termed as Scheduled
Banks.State-owned commercial banks, private commercial banks, Islamic
commercial banks, foreign commercial banks and some specialized banks
are Scheduled Banks.
Non-Scheduled Banks: The banks which are established for special and
definite objective and operate under the acts that are enacted for meeting
up those objectives, are termed as Non-`Scheduled Banks. These banks
cannot perform all functions of scheduled banks. Grameen Bank, Probashi
Kallyan Bank, Karmasangsthan Bank, Progoti Co-operative Land
Development Bank Limited (progoti Bank) and Answer VDP Unnayan Bank
are Non-Scheduled Banks.

Typology of Banks: (with examples from Bangladesh

On the basis of their scope and types of functions, banks can be divided into
following types:

Central Bank:
Central banks are bankers banks, and these banks trace their history from
the Bank of England. They guarantee stable monetary and financial policy
from country to country and play an important role in the economy of the
country. Typical functions include implementing monetary policy, managing

foreign exchange and gold reserves, making decisions regarding official

interest rates, acting as banker to the government and other banks, and
regulating and supervising the banking industry.
These banks buy government debt, have a monopoly on the issuance of
paper money, and often act as a lender of last resort to commercial banks.
The Central bank of any country supervises controls and regulates the
activities of all the commercial banks of that country and controlscoordinates currency and credit policies of that country. Ex: Bangladesh Bank

Commercial Bank: This term used for a normal bank to distinguish it

from an investment bank. Some use the term "commercial bank" to refer to a
bank or a division of a bank that mostly deals with deposits and loans from
corporations or large businesses.
Commercial Banks can be divided into following categories:
State Owned Commercial Banks:
State owned commercial Banks are those in which the government has a
major stake and they usually need to emphasize on social objectives than on
profitability. In Bangladesh, State-owned banks are functioning as nationalist.
Among the state owned banks, six are commercial Banks, these are- Sonali
Bank Limited; Janata Bank Limited; Agrani Bank Limited; Rupali Bank
Limited; BASIC Bank Limited; Bangladesh Development Bank Limited.
Private sector commercial banks:
Private sector banks are owned, managed and controlled by private
promoters and they are free to operate as per market forces. In Bangladesh,
Private banks are the highest growth sector due to the dismal performances
of government banks. They tend to offer better service and products.
Renowned private banks are - BRAC Bank Limited, Meghna Bank Limited,
Bangladesh Commerce Bank Limited, Bank Asia Limited, AB Bank Limited,
Dhaka Bank Limited, Dutch Bangla Bank Limited, Eastern Bank Limited, IFIC
Bank Limited, Jamuna Bank Limited.
Specialized Banks:
Specialized banks are foreign exchange banks, industrial banks,
development banks, export-import banks catering to specific needs of these
unique activities. These banks provide financial aid to industries, heavy
turnkey projects and foreign trade. In Bangladesh, These banks are also fully

or majorly owned by the Government of Bangladesh. Here, Scheduled

Specialized Banks: Bangladesh Krishi Bank, Rajshahi Krishi Unnayan Bank
and Non-Scheduled Specialized Banks: Karmasangsthan Bank, Probashi
Kallyan Bank, Palli Sanchay Bank, Ansar-VDP Unnayan Bank.
Foreign Banks:
The commercial Banks which are operating in a country as the branches of
the banks incorporating in abroad. There are 9 FCBs in Bangladesh such as:
Citibank, HSBC Standard Chartered Bank etc.
Islamic banks:
It adhere to the concepts of Islamic law. This form of banking revolves
around several well-established principles based on Islamic canons. All
banking activities must avoid interest, a concept that is forbidden in Islam.
Instead, the bank earns profit (markup) and fees on the financing facilities
that it extends to customers. In Bangladesh, There are 8 Islami Shariah
based PCBs in Bangladesh and they execute banking activities according to
Islami Shariah based principles i.e. Profit-Loss Sharing (PLS) mode. Such asBangladesh Islami Bank Ltd. IFIC bank Ltd.

Cooperative Banks:
Cooperative Banks are governed by the provisions of State Cooperative
Societies Act and meant essentially for providing cheap credit to their
members. It is an important source of rural credit i.e., agricultural financing
in Bangladesh. Ex: Bangladesh Samabaya Bank Ltd; The Dhaka Mercantile
co-operative Bank Ltd; Progoti Co-operative Land Development Bank Limited
(Progoti Bank).

Investment Banks:
An investment bank is a financial institution that assists individuals,
corporations and governments in raising capital by underwriting and/or
acting as the client's agent in the issuance of securities. An investment bank
may also assist companies involved in mergers and acquisitions, and provide
ancillary services such as market making, trading of derivatives, fixed
income instruments, foreign exchange, commodities, and equity securities.
Investment banks aid companies in acquiring funds and they provide advice
for a wide range of transactions. These banks also offer financial consulting
services to companies and give advice on mergers and acquisitions and
management of public assets.

Regulators of the Financial System in Bangladesh:

Regulator Of Banks: Under the Section 7A of BB Order, 1972, Bangladesh
Bank act as the regulator of all kinds of financial activities done by any kinds
of bank within the country.
Insurance Authority: Insurance Development and Regulatory Authority
(IDRA) has been working as a regulator for Insurance companies empowering
by the act of Insurance Development and Regulatory Act, 2010.
Regulator of Capital Market Intermediaries: Securities and Exchange
Commission (SEC) performs the functions to regulate the capital market
intermediaries and issuance of capital and financial instruments under the
provision of the Securities and Exchange Commission Act, 1993.
Regulator of Micro Finance Institutions: Microcredit Regulatory
Authority (MRA) is working with a view to ensuring transparency and
accountability of microcredit activities of the NGO-MFIs in the country under
the provision of the act enacted "Microcredit Regulatory Authority Act,