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Objectives and

Importance of Bank
Objectives and
Importance of Bank

Shibli Rubayat Ul Islam


Professor and Chairman
Dept. of Banking & Insurance
Bank:
 There is no unanimous opinion as to
when and how the word “Bank” was
derived. But it is assumed that this
word derived from the ancient Latin
words “Banco” , “Bangk”, “Bancus”
and “Banque”. Meaning of these words
is long bench. Once a class of people
used to sit in the bench particularly in
Lombardy street of Italy for taking
deposit and lending money as a
banking business.
Definition of Bank:

 Different authors have defined the “Bank”


in different ways with a common principle
to accept deposit from the public and
lending the same to the borrowers.

 Some important definitions are:


 “A bank is an establishment which trades
in money, and establishment for deposit
custody and issue of money, and also for
granting loan and discounting bills and
facilitating transmission of remittances
from one place to another”
... from Imperial Dictionary.
Definition of Bank:
 “An organization through which funds in the
form of money or claim to money are
assembled and transferred from those
individuals and firms having a surplus of
economic goods(as represented by such
funds) to other individuals & firm whose needs
for funds exceed their existing supply”
..... from Rollin G. Thomas.

“Banking" means the accepting, for the purpose


of lending or investment, of deposits of money
from the public, repayable on demand or
otherwise, and withdraw able by cheque,
draft, order or otherwise.
..from The Bank Company Act, 1991.
Definition of Bank:
 In the context of risk management in the banking
business it may be defined as:

 Collecting/accepting of fund from the public for


investing/lending of the same to earn optimum level
of return by managing all relevant risk factors
involved therein.
The core risks in the banking business are –
• Credit Risks

• Asset and Liability/Balance Sheet Risks

• Foreign Exchange Risks

• Internal Control and Compliance Risks

• Money Laundering Risks

• IT Risks

 Bangladesh Bank has provided required guidelines in


the form of a manual against each risk.
Banker:
 Section-3 of NI Act. states that Banker means
“ a person transacting the business of
accepting for the purpose of lending or
investment of deposits of money from the
public, repayable on demand or otherwise and
withdrawable by cheque, draft, order or
otherwise and includes any post office savings
Bank”.

 According to Bill of exchange Act of 1882


Banker includes a body of persons whether
incorporated or not who carry on the
“business of banking”.

 From the above definition it reveals that both


company and individual as official of the
company may be treated as Banker. In reality
Components of legal framework for banking
transaction
 The Bangladesh Bank Order – 1972
 The Bank Company Act – 1991
 The Companies Act – 1994
 The Negotiable Instrument Act – 1881
 The Partnership Act – 1932
 The Registration Act – 1908
 The Contract Act – 1872
 Securities & Exchange Commission Act – 1993
 The Income Tax Ordinance - 1984
 Bankruptcy Act – 1997
 Bank Deposit Insurance Act – 2000
 The Bankers Book Evidence Act – 1891
 The Limitation Act – 1908
 The Stamp Act – 1899
 The Transfer of Property Act – 1882
 Anti Money Laundering Act – 2009
 Anti Terrorist Act –2009
 Artho Rin Adalot Ain - 2003
 Foreign Exchange Regulation Act - 1947
 Bangladesh Bank’s Circulars/guidelines given time to time – Under prevailing
Acts
 Customs Act
 Pre-shipment Inspection Act
Components of legal framework for
banking transaction

 International rules of ICC :


 UCPDC
 eUCP
 ISBP
 URR
 URC
 Incoterms
Bank in the context of Bangladesh:

 After liberation of the country on 16th


December’1971 Government took over the then
existing banks under Bangladesh Bank
(Nationalizations) Order-1972, P.O. order No.
26 with retrospective effect from 16th
December’1971. At the same time Central Bank
i.e. “Bangladesh Bank” was created by the
Government of Peoples Republic of Bangladesh
under Bangladesh Bank Order of 1972 (P.O No.
127) with retrospective effective from 16th
December’1971.
On nationalization, the position of the commercial banks was as
follows:

Pre-nationalization After nationalization Authorized/(paid up) capital

1. National Bank of Pakistan Sonali Bank 50(20) million


2. Bank of Bhawalpur Ltd
3. Premier Bank Ltd

1. Habib Bank Ltd Agrani Bank 50(10) million


2. Commerce bank Ltd

1. United Bank Ltd Janata Bank 50(15) million


2. Union Bank Ltd

1. Muslim Commercial Bank Rupali Bank 50(10) million


2. Standard Bank ltd
3. Australasia bank ltd

1. Eastern Mercantile Bank Ltd Pubali Bank 50(10) million

1. Eastern Banking Corporation Uttara Bank 50(10) million


Creation of Bangladesh Bank by
Presidential Order No.-127 of 1972.

 On complete liberation of the country from


the Pakistani occupancy forces in 1971
immediate steps had to be taken by the
Government to set up the central bank since
there was no scope left for the state Bank of
Pakistan. To ensure the sound going of the
financial sector of the country Bangladesh
Bank was formed by the Presidential order
no-127 of 1972.
Major departments or Administrative
Units of Bangladesh Bank:
• Accounts & Budgeting Department
• Agricultural Credit Department
• Anti-Money Laundering Department
• Bangladesh Bank Training Academy
• Banking Regulation and Policy Department
• Central Bank Strengthening Project Cell
• Common Services Department
• Credit Information Bureau
• Debt Management Department
• Department of Banking Inspection 1
• Department of Banking Inspection 2
• Department of Currency Management and Payment System
• Department of Financial Institutions and Markets
• Department of Off-Site Supervision
• Department of Printing and Publications
• Equity and Entrepreneurship Fund Unit
• Expenditure Management Department
Major departments or Administrative
Units of Bangladesh Bank:

• Foreign Exchange Inspection & Vigilance Department


• Foreign Exchange Investment Department
• Foreign Exchange Operation Department
• Foreign Exchange Policy Department
• Forex Reserve & Treasury Management Department
• Governor's Secretariat
• Human Resources Department
• Information Systems Development Department
• Internal Audit Department
• Investment Promotion & Financing Facility Project Cell
• IT Operation & Communication Department
• Law Department
• Monetary Policy Department
• Policy Analysis Unit
• Research Department
• Security Management Department
• SME & Special Programmes Department
• Special Studies Cell
• Statistics Department
Objectives and importance of Bank:

 The objectives and importance of Bank can


be viewed from three different
perspectives namely from the view point
of owners, government and customers.
Objectives of Bank from owner’s
viewpoint:

Earning profit: Profit motive of the owners of the Bank acts as a


driving force in engaging themselves in the business of
banking like all other business.

Rendering Services: Bank renders various services to the


society as a part of their social commitment and this is a
prime objective for engaging in banking business. Bankers are
not only to make profit but also to do some good to the
society.

Investment of fund: The owners of the bank treat the bank as


a suitable sector to invest their accumulated saved money.

Earning good will: The owners of bank take bank as a way of


earning good will by enhancing the periphery of their banking
business.

Raising efficiency: The owners sharpen their managerial skill


and efficiency by ensuring smooth operation of their banking
business.
Objectives of Bank from
Government viewpoint:
Issuance of currency notes: Goverment issues currency notes as a
medium of exchange through banks.

Formation of capital in society: Government always encourages


formation of capital in society through households and bank act as a
catalyzing force in formation of capital in different sectors of the
society.

Investment of capital and industrialization: Bank helps investment


of ideal money through its various asset products and expedites
industalization. Eventually this helps the growth of GDP, alleviating
poverty and ensures equal distribution of wealth.

Control over money market: Bank by its various products helps in


controlling money market (supply of money in the market) and
guards against the economy to be inflated.

Creation of employment opportunities: Bank to fulfill its human


resource requirements and create a substantial employment
opportunities.

Counseling in financial matters: Banks sometimes put up effective


suggestions to Govt in financial matters from their part.
Objectives of Bank from Customer’s
viewpoint:
Safe custodian of public money: Bank acts as a safe
custodian of public money. By depositing own money
into a Bank account people get rid of worries like theft,
burglary and snatching.

Advice and counseling: Sometimes bank acts as a


financial advisers to its customers in various aspects.

Representative or trustee: Bank sometimes performs


the role of a representative or trustee on behalf of its
customers.

Providing credit facility: Bank provides credit facility to


its customers and makes opportunities to invest in
profitable sector and by the process create income
opportunities for customers.
Objectives and importance of
Bank

From From From


Bank’s Govt’s customer’s
viewpoint viewpoint viewpoint

Earning Investmen Raising Issuance of Investment of Creation of


profit t of fund efficiency currency capital and employment
notes industrialization opportunities

Rendering Earning Formation of Control over Counseling in


Services good will capital in money financial matters
society market

Safe custodian Advice and Representative or Providing credit


of public counseling
trustee facility
money
Financial Structure of Bangladesh:

In the financial sectors of Bangladesh, there are five


players, names of the players with their regulators are
given below.

Category of Institutions Regulator

A. Commercial Banking institutions Bangladesh Bank


B. Non-Banking Financial Institutions

C. Capital Market Operation Bangladesh Security and Exchange


Commission

D. Insurance Company Insurance development and


regulatory Association (Finance
Ministry)

E. Micro Financing Institutions Micro credit Regulatory Authority


formed by Microcredit Regulatory
Authority Act, 2006
The control mechanism of Bangladesh Bank and its controlled bodies are
shown with tree diagram:

Bangladesh Bank

NBFIs
Bank Financial
Institution

Commercial Specialized Lease Housing Investment


Bank Bank Financing Finance Finance

PCBs
NCBs FCBs

By virtue of Bangladesh Bank order-1972 both Banking and Non-Banking financial institutions are controlled and
supervised by Bangladesh Bank to a large extent. Later on The Banking Company Act-1991 (amended-1993) and
Financial Institutions Act-1991 was passed replacing the relevant provisions of Bangladesh Bank order-1972 to make the
control mechanism and regulatory weapons more effective. (Source BB web side).
Types of Bank:
Bank be classified as follows:
A. Based on organizational Characteristic
B. Based on Technique
Based on organizational Characteristic
1. Branch Banking: A banking system where operation of branches that
situated in different parts of the country or even in abroad executed under
control of head office. Branch office has no different identity. Branch office
works as a representative or follow all instruction/circulars of head office for
performing banking activities.
2. Unit Banking: Operations of banking system are conducted by single
office/unit having no other branches. It usually collects deposit from the
small communities in that particular area and places those deposits with
bigger bank. Since the unit banks are small in size, thus they cannot provide
remittance facilities to their customer.

i. Holding Company Banking or Group Banking: Holding company banking/


group banking system actually refers two or more banks, which are held as
subsidiaries by holding company

i. Chain Banking: When two or more banks are operated and controlled
jointly by keeping separate identity in order to avoid competition among
themselves termed as chain banking.
Types of Bank:

Based on Technique:

1. Deposit Banking: Deposit banking is actually deposit taking from the members of the
public.

2. Investment Banking: Investment banks are the specialized institutions engaged in


providing assistance to the commercial companies in raising their long-term capital through
sale of shares, stocks, and bonds in the open market. The activities of investment banking
may be classified as (a) Originating, (b) underwriting and (c) retailing on behalf of individual
and institutional investors.

3. Merchant Banking: Merchant bank is a financial institution primarily engaged in offering


financial services and advice to corporations and to wealthy individuals. The term can also be
used to describe the private equity activities of banking. The chief distinction between an
investment bank and a merchant bank is that a merchant bank invests its own capital in a
client company whereas an investment bank purely distributes (and trades) the securities of
that company in its capital raising role.

4. Mixed Banking: Mixed banking generally refers to combination of commercial banking and

investment banking.
Banking System

Based on organizational Based on Technique


Characteristic

Branch Unit Deposit Investment Merchant Mixed


Banking Banking Banking Banking Banking Banking

Chain Holding Company


Banking Banking
Scheduled Bank and non-scheduled
Bank

From the enlistment point of view


banks are categorized into two
groups-
A. Scheduled Banks
B. Non- Scheduled Banks
A. Schedule Bank:
“Schedule Bank” means a bank for the time being
included in the list of banks maintained under sub-
clause (a) of clause 2 of article 37 of Bangladesh Bank
Order, 1972.

So as per sub-clause (a) of clause 2 of article 37 of


Bangladesh Bank Order, 1972, Any bank to be
scheduled bank which—

 is carrying on the “business of Banking”

 is a “banking company” as defined in section-5 of the Banking


Company Act-1991 or a co-operative bank, or a corporation or
a company incorporated by or established under any law in
force in any place in or outside Bangladesh.

 has a paid -up capital and reserves of an aggregate value of


[an amount not less than that required to be maintained under
Banking company act-1991 amended as on 1993]. Provided
that in the case of a co-operative bank, an exception may be
made by the Bank.

 satisfies the Bank that its affairs are not being conducted in a
manner detrimental to the interests of its depositors.
A. Schedule Bank:
The above stated four conditions which are eventually the
characteristics of a scheduled bank must be followed
meticulously to be a schedule bank.

Categorical list of existing schedule Bank in


Bangladesh
State owned Commercial Bank :
1. Sonali Bank Limited
2. Janata Bank Limited
3. Agrani Bank Limited
4. Rupali Bank Limited
5. Bangladesh Development Bank Limited
A. Schedule Bank:
Private commercial Bank:
1. AB Bank Limited
2. Al-Arafah Islami Bank Limited
3. Bangladesh Commerce Bank Limited
4. Bank Asia Limited
5. BASIC Bank Limited
6. BRAC Bank Limited
7. Dhaka Bank Limited
8. Dutch-Bangla Bank Limited
9. Eastern Bank Limited
10. EXIM Bank Limited
11. First Security Islami Bank Limited
12. ICB Islamic Bank Ltd.
13. IFIC Bank Limited
14. Islami Bank Bangladesh Ltd
15. Jamuna Bank Ltd
16. Mercantile Bank Limited
17. Mutual Trust Bank Limited
18. National Bank Limited
19. National Credit & Commerce Bank Ltd
20. One Bank Limited
21. Premier Bank Limited
22. Prime Bank Ltd
23. Pubali Bank Limited
24. Shahjalal Bank Limited
25. Social Islami Bank Ltd.
26. Southeast Bank Limited
27. Standard Bank Limited
28. The City Bank Ltd.
29. Trust Bank Limited
30. United Commercial Bank Limited
31. Uttara Bank Limited
A. Schedule Bank:
Specialized Bank :
1. Bangladesh Krishi Bank
2. Rajshahi Krishi Unnayan Bank
A. Schedule Bank:
Foreign Commercial Bank :

1. The Hong Kong and Shanghai Banking


Corporation. Ltd.
2. Bank Al-Falah Limited
3. Commercial Bank of Ceylon Limited
4. Habib Bank Ltd.
5. National Bank of Pakistan
6. Citibank N.A
7. Standard Chartered Bank
8. State Bank of India
9. Woori Bank
b. Non-Schedule Bank:
Banks which are not included in the list of scheduled
bank maintained by the central bank are called
Non- schedule bank.

The salient features of a non-scheduled bank may be


descried as below:
• Has no statutory binding to maintain a Statutory
liquidity.
• Has no binding on capital adequacy in relation to
built up asset portfolio.
• Has lesser day-to-day restrictions imposed by central
bank.
• Has no clearing arrangement with central bank.

As of latest there are four Non-schedule banks in


Bangladesh namely- a) Bangladesh Samabay Bank
Ltd. b) Grameen Bank. c) Karma Sangsthan Bank.
and d) Ansar- VDP Unnayan Bank.
Nature of deposit:

Deposit is termed as the fresh blood of a bank. In


true sense money placed in a bank against which
the depositor can withdraw under prescribed
conditions. Actually bank is a financial
intermediary, which ensures fund to flow to deficit
economic units from surplus economic units. In
doing this banks engaged themselves in collecting
deposits from public by developing various deposit
products.
Nature of deposit:

Deposit

Term Deposit-Generally deposited


Demand Deposit- Withdrawal
for a definite period
on demand

Current Saving Short Term Fixed Scheme


Deposit Deposit Deposit Deposit Deposit
Nature of deposit:
Current Deposit: Generally this is a non-interest
bearing demand depository account relationship
having some exception now a days. In this kind of
deposit account there is no withdrawl bar.

Savings Deposit: This is an interest bearing


demand depository account relationship where
application of interest will be subject to some
withdrawl bars and maintenance of minimum
balance in the account.

Short Term Deposit: This is an interest bearing


demand depository account relationship specially
tailored for corporate customers where application
of interest will be subject to some withdraw bars
and maintenance of minimum balance in the
account.
Nature of deposit:
Fixed Deposit: This is a fixed term depository
relationship where a predetermined interest rate
will be applied on the deposited amount and the
maturity value of the amount is not stipulated at
the time of deposit. These accounts can be
liquidated before maturity by fulfilling certain
terms and conditions and sacrificing some amount
as penalty interest.

Deposit under scheme: This is a fixed term


depository relationship where the maturity value or
the interim benefits are predetermined. These
accounts can be liquidated before maturity by
fulfilling certain terms and conditions and
sacrificing some amount as penalty interest. These
products are designed by the commercials banks
as a desperate endeavor of their deposit hunting.
Types of Accounts:
For mobilizing deposit from customer, bank offers
different types of A/C:

A. In case of Demand Deposit:


• Current Deposit A/C
• Saving Bank A/C
• Short Term Deposit A/C
Types of Accounts:

B. In case of term Deposit:

• Fixed deposit A/C: Fixed deposit may be


in different term such as 3 months, 6
months, 9 months, 12 months, etc.

• Scheme Deposit A/C: Scheme Deposit


may be in different period such as 3
years, 5 years, 8 years and 10 years.
KYC (Know your customer) &
TP(Transaction profile):
As per section 25 of AML Act, 2009 before opening
of any A/C by a Bank entire identity of intended
A/C holder should be obtained. Accordingly,
based on this section BB has provided guidelines
as to how KYC & TP to be maintained. For this
purpose format of KYC and TP form are annexed
as an integral part of the uniform A/C opening
form.

In KYC detailed information in regard to present


and permanent address, profession, source of
income, TIN, VAT, ID number etc. are to be
furnished.
KYC (Know your customer) &
TP(Transaction profile):

In TP, expected amount to be


deposited/withdrawn daily, weekly or monthly,
nature of profession, sources of income, Net
worth, total expected amount of transactions
in a year etc. are to be furnished. For
measuring the risk level of the intended A/C
holder, considering the above factors a “Score
mark” is determined. “14” has been taken as a
standard mark for measuring risk level. Below
14 is considered as low risk level and 14 &
above considered as high level risk.

Low risk <14≥High risk.


Nominee:

As per section 103 of Bank Company Act 1991


and subsequent regulation issued by Banking
Regulation and Policy Department 2001
(BRPD) of Bangladesh Bank, at the time of
opening of A/C intended A/C holder must
provide nominee. Nothing has been mentioned
in regard to photograph and signature of
the A/C holder but in practice all banks collect
photograph of the nominee and some banks
also obtain signature of the nominee.
Introducer:

As regards identification of the A/C holder by an introducer it


is a mandatory requirement as a practice for opening an
A/C. As per Section 131 of the NI Act Bank shall act in
good faith and without negligence in dealing with the
customers. But what is good faith and without negligence
has not been defined in the Act. It is decided by the
situations under which incident occurs. If an account is
opened without identification of introducer it shall be
treated as negligence.