Contemporary Issues in Banking Sector in Bangladesh

The smooth drive of the moves of an economy hinge on some vital sectors that straightly subsidize
to sustainable economic growth and development. The banking sector is painstaking as one of the
most important players in firming up the soundness of an economy. The banking sector in
Bangladesh has been carrying out well in footings of profitability, employment generation and
operations for the duration of the past few decades. The value of bank shares in the stock market
is reasonably high. But this sector’s performance has noticeably declined in the recent years. The
banking industry has been fronting the challenges ascending from political uncertainties and
instability, frauds, in addition to inept management, corruption, unprofessional personnel in the
management, inadequate capital base, political interference in decision making and so on.
Challenges and vulnerabilities of the banking industry are amongst the major newspaper headlines.
Especially, the volumes of non-performing loans (NPL) and governance issues have become key
concerns.
Now, lets look at the contemporary issues the banking sector is facing in our country:

1. Scandals: News about bank directors and chairmen’s involvement in politics and
underhand deals using banks’ goodwill has raised questions about banks’ integrity in
running their operations. The image of the banking industry has been tarnished by
numerous scandals directly implicating the owners and directors of the banks. Just recently,
there was a lot of media coverage on a number of prominent banks being involved in
underhand activities such as Farmers Bank scandal, Janata Bank loan scam, Bangladesh
Bank’s gold scam. The scandals eventually led to a number of directors resigning or being
removed in order to avoid any further controversy. Despite the considerable progress our
banking sector has made, foreign countries still have doubts about our banking activities
because of the unscrupulous practices of a number of prominent banks. Fixing that
unfavorable image is not the only hurdle on the road to developing a respectable and
successful financial sector; there are also problems regarding 2 Ps 3Cs and a T- people,
product, compliance and ethics, competition, change management and technology among
others.

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2. Liquidity Crisis: Now it is one of the talks of the tongue about the banking sector of
Bangladesh is liquidity crisis. The smoothly-run economy was hit by a serious liquidity
crisis a couple of months back. As a result, banks' lending rates have hit double digits again
after more than a year, making things harder for businesses and consumers alike. All these
have started taking a toll on investors and consumers as banks have already increased their
lending rates significantly. The rate hike will also badly hurt businesses that took industrial
term loans at single digit interest rates in the last two years. Unreasonable hike in interest
rates will hamper the economic growth and push inflation up. Additionally, spiraling non-
performing loans, increasing black money, trapping money in the share market, and
siphoning money outside of the country might be the possible causes behind the current
liquidity crisis.
 Withdrawal of money from private commercial banks (PCBs)
 Increase import cost and decrease export revenue
 Decrease foreign remittance because illegal channel of mobile banking, money
laundering
 Create pressure of dollar reserve, BB collect 12,000/= crore taka from market by
selling 150 crore U.S dollar
 Restrict loan flow circulation by Bangladesh Bank guideline & rules:
 Attractive rate of Government ‘’Sanchaya pattra’’ or Saving Certificate >>transfer
money from private Bank to this Governmental security
 Abnormal competition of deposit collection among banks
3. Unhealthy competition: There is competition not only from other banks but also from
non-bank financial institutions (NBFI) and micro finance institutions (MFI), and no
effective framework or regulatory body to harmonize them. Not only are the institutions
competing, the regulators and customers are also pitting one against the other, making the
situation extremely difficult giving you the feeling of being stuck between a rock and a
hard place. A customer will often try to make the best out of the situation by not complying
with the regulatory requirement, referring to the service provided by another bank or banks.
The requirement of bank executives to meet steep targets often results in succumbing to
the demand of these corporates, resulting in the bypassing of regulations, because it’s a
matter of survival for them. One bypass result in another, and then another, resulting in a

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 continuous loop of malpractice that has now become the norm. Competition in the banking
industry is also taking a hit from the capital market end, as the big banks are increasingly
going to the equity market to raise more funds. More importantly, it forces them to risk
their position by over exposing them to volatile capital market through proprietary trading
and position taking in order to maintain profitability.
4. Regulatory challenges: Regulatory changes have been brought in several areas of banking
and financial sector either to align these with global standards or to address internal needs
and requirements. The outcome is delay in implementation, confusion among stakeholders
and new techniques to bypass these regulations. This in its turn creates a non-level playing
field for those who comply with the regulation Ultimately, every citizen of the country is
affected as the whole country suffers. The banking sector could be our pride and a major
growth engine of the economy. But instead, it is doing everything it can to enrich its
owners, at the expense of everyone else versus those cleverly “managing” the situation
without having to comply. If the regulators and the legal system were honest then all these
recurring image issues and malpractices could have been avoided.
5. Non-Performing loans: A non-performing loan is a loan that is in default or close to being
in default. Many loans become non-performing after being in default for 90 days, but this
can depend on the contract terms. At the end of 2018, default loans of the banking sector
hit nearly Tk1,00,000 crore for the first time in the country's history. The amount of NPLs
stood at Tk99,370 crore, or 11.45% of disbursed loans, at the end of September, 2018. The
bad loans of banks rose by a staggering Tk19,063.71 crore since 2017.
6. Political influence: Giving license of new banks in political perspective, appointment of
board of directors (note: respondents identified it as most influential factor), priority of
political identity during loan sanctioning, giving special facilities in loan
recovery/restructuring/rescheduling to politically affiliated defaulters, lack of tendency of
remarkable punishment to them etc.
7. Poor Customer Service: It’s certainly frustrating when bank employees don’t know how
to resolve an issue. Getting switched from person to person, and being put on hold multiple
times can test anyone’s temper. Unfortunately, there’s not much you can do except try to
remain calm and get the issue fixed as soon as possible. Speaking to a manager is always
best, but sometimes even the manager won’t be much help either. Lashing out at bank

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 workers will not help the situation. Staying cool and collected is the best way to move
things forward. this problem is especially large in public banks. Some of them pointed out
this issue as one of the prime causes of low service quality. Again, some others have tried
to make an association between this issue and the hacking of the reserve of Bangladesh
Bank, which was occurred few months back.
8. Low quality of asset: The main assets of any bank which they use as their uses or
investments are: Reserve, Cash item in process of collection, Deposits at other banks,
Securities and most importantly Loans. But in our banking sector there are several
problems related to the low quality of assets which banks are using day by day. If any bank
maintains more money than their required reserve it will be known or stated as excess
reserve. The adequacy of the required reserve of the bank is very important for any
country’s economy because if any bank holds any excess reserve, the money that they are
holding in their volts or other sectors it will be stated as idle money which brings no return.
9. Lack of good governance, accountability and transparency: The banking industry of
Bangladesh has continuously made considerable progress but despite this situation the
foreign countries are consider our banking system or banking industry activities as
questionable. This occurs because recent news about bank directors and chairmen’s
involvement in political parties. Also there has been a possibility to unhand bank’s
important deals with using the bank’s goodwill which will question the factor that is our
banking industry and its’ operations are independent & reliable. Because of the lack of
good governance whatever the banks are publishing in their annual reports and regulatory
paperwork’s and the data they are putting in those papers are accurate or not. Government
is failing to achieve growth of the credit target which is contributing to the lower
investment. The Incremental Capital Output Ratio (ICOR) which measure the investments
of any country has shown us that the GDP of Bangladesh may be increased which is
deteriorating over the past few years. In recent years the growth of credit is also declining
because of the consecutive monetary policy of Bangladesh Bank, political unrest,
uncertainty in Bangladesh and most of all lack of infrastructure facilities and lawlessness.
10. Weaknesses of law: “Generally defaulted clients get time from The Honorable Court and
again misuse their basic right to get „stay order‟ and extent the stay order period repeatedly,
which prolongs the process of loan recovery using judicial action. Unfortunately, there is

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 no option to prevent the clients from the frequent extension of the stay order”, said one of
our respondents. Again, with the help of this „stay order‟ defaulters keep themselves away
from listing their name as defaulters in Credit Information Bureau (CIB) database. Thus,
easily such defaulters can take loan from another bank by hiding their true information.
Actually, according to our respondents, there remain many lapses of present law related to
banking. Which are creating big problems in this arena.
11. Macro Risks: However, unavoidable risks, like political risk, risk of macroeconomic
downturn, etc. cannot be prevented by the banks. To some extent, these factors affect the
performance of these banks. This forces the banks to focus more on short term planning
and short-term adjustments than long term planning, since there is a significant amount of
uncertainty among the banks about the future. Since in this case, banks with more
capabilities of adjusting to changed circumstances perform better, a considerable amount
of manpower and resources of each bank is directed towards the monitoring and prediction
of movements in the economy and the changes in the government.
12. Borrowing from the Govt. bank: Banks are borrowing more money from the government
since July-September, 2013. Because of the increase of borrowings in every year the
expenditure is also going up because of the higher interest payment they have to pay to the
government for their borrowings.
13. Unstable capital market: Some of our respondents highlighted that, due to unstable
capital market of Bangladesh, banks aren’t becoming able to collect money from this
market. On the other hand, they aren’t becoming able to make large scale investment in
this market.
14. Fund transfer to outside of the country and diversification: Most of our respondents
have identified that fund transfer and diversification are also major causes behind the
present crisis scenario of banking sector. They pointed out that through over invoicing or
money laundering fund commonly are transferred to the outside of this country. Again,
according to them, taking loan mentioning for one purpose and whereas using for other
purposes i.e. purchasing land or some risky assets, is also one of the big causes of default
loan.
15. Low remittance: Due to mainly downturn in export of RMG product our remittance
income isn’t so good. Again, major parts of our remittances aren’t coming using formal

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 channel. That’s why pressure has been created in dollar price. That’s further intensifying
liquidity crisis of banks.
16. Credit Growth: Credit growth is the increase in the loans for the private sector,
individuals, establishments and public organizations. When credit is expanding or
increasing, consumers can borrow and spend more and businesses can borrow and invest
more. The expansion of credit tends to cause the price of assets such as property and stocks
to increase, thereby boosting the net worth of the public. Increasing consumption and
investment produces jobs and expands income and profits. However, every credit-induced
economic boom comes to an end when one or more important sector of the economy
becomes incapable of repaying the interest on its debt.
17. Lack of following proper guidelines in case of loan sanctioning and disbursement:
Shortage of enough collateral, poor quality of collateral assets, application of proper credit
appraisal systems, unskilled manpower, lack of proper sources of credit information etc.
further intensified the poor quality of loan investment of banks. Some of them highlighted
that the Credit Information Bureau (CIB) can’t provide real picture of all borrowers.
“Because many large defaulters are becoming able to remove their name from defaulter’s
list using various mechanism.

Challenges and Constraints of E-Banking

18. Infrastructural Barriers: Infrastructural barriers were one of the most important
challenges for e-banking in Bangladesh. Here, there is not enough infrastructural support
for providing efficient e-banking services. In our country, telecommunication services
were not strong, communication bandwidth is weak, software is not available in the country
and hardware for establishing ATM booth is costly.
19. Knowledge Barriers: E-business is still not very much progressed in Bangladesh. Mass
awareness is not feasible. The country faces problem of developing trained human
resources. There were lack of technological knowledge among the managers, employees,
and customers of bank.
20. Legal and Security Barriers: In Bangladeshi circumstance lack and limitation of
regulation of law is one of the acute obstacles to e-banking. On the other hand, in an
underdeveloped country like ours, frauds were gaining significant potential which indicates

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 a negative output in our local e-banking sector. Besides these barriers, our courts don’t
consider electronic documents as evidence, so people with a high risk of transaction were
not much interested to get e-banking facilities. Technical issues were also highly connected
to e-banking, but in Bangladesh technical securities were very weak an in a high risk of
hacking in each moment. So, customer’s trust in e-banking is still beyond imagination in
Bangladesh
21. Socio-cultural and Economic Barriers: As mentioned earlier, most of the people are not
educated in Bangladesh. So, people are not willing to break the traditional way of
conventional banking and always hold a negative perception regarding e-banking. Another
important issue is banks employees also hold a negative outlook to e-banking thinking of
uncertainty of their jobs. On the other hand, many traditional customers prefer paper money
and receipts over e-documents for their ignorance and weakness in English language. In
Bangladesh, economic barriers were one of the most challenges for e-banking. For
providing e-banking services to the customer, it needs for heavy investment regarding new
infrastructures.
22. Lack of Awareness and Human Capital: E-business is still not very much progressed in
Bangladesh. Mass awareness is not feasible. The country faces problem of developing
human-capital. Without preparing human capital at the level of international standard, we
cannot be able to compete in global market and successful e-business cannot be possible.
23. Unsatisfying Services and Customer Relationship: Nationalized commercial banks and
specialized banks were lagging behind of online banking services. Moreover, customers
were not satisfied with the quality of the services. They were not also very happy with the
behavior of the bank personnel. However, it reveals that e-business especially with the help
of online banking can manage economy of Bangladesh in a far better way as customer
relationship management increases.
24. Unavailability of Locally Produced Software: Local Banking software may be
developed properly and must have greater accessibility within the country and outside the
country. Moreover, to produce hardware especially computer and its accessories, local
entrepreneurs were not taking any sort of strategic planning.

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 25. Limited Number of Online Customer Due to High Cost: The number of customers
taking banking services does not capable to bear the cost of additional equipment like
computer, computer accessories, Internet etc. from their own organization or at home.
Biometrics may be more strengthened. Using Internet facility still very costly and people
has little knowledge in operating computers. A few numbers of cybercafé are available but
for banking purpose customers do not feel safe to use these facilities. As a result, total
numbers of customers who were habituated in online banking systems were limited.
26. Financial Risks: Although online banking has bright prospects, it involves some financial
risks as well. The major risk of on-line banking includes operational risks (e.g. security
risks, system design, implementation and maintenance risks); customer misuse of products
and services risks; legal risks (e.g. without proper legal support, money laundering may be
influenced); strategic risks; reputation risks (e.g. in case the bank fails to provide secure
and trouble free e-banking services, this will cause reputation risk); credit risks; market
risks; and liquidity risks. Therefore, identification of relevant risks, and formulation and
implementation of proper risk management policies and strategy formulations and
implementations are important for the scheduled banks while performing online banking
system.

Conclusion
Banks are formed to ensure smoother financial activities of the country’s economy. From the
beginning people trust on the banking activities as well as their rules and regulation and keep their
money for safety and security. But today banking activities become corrupted and depend on some
selective persons’ decision. The regulation of bank affected abruptly and the faith of depositors
and investors become lessen upon banking sector. The entire management system has been
involved to lose their reputation. In this situation this is the duty of Bangladesh bank to handle
strictly the commercial banking activities and immediately enforce the rules and regulation which
are applicable to improve the condition of those banks and as well as the entire economy.