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Banking System, Modern


Banking System, Modern Although there is no formal evidence of the existence of banks in Bengal during the period before 400 BC, traders of this period were known to have carried out activities to provide financial assistance among themselves. The wealthy people of that period used to put their surplus money and valuables under the soil in brass-made pitchers and maintained accounts for them by writing on the body of dishes made of gold or silver. The vedas mentions the practice of informal banking in the form of borrowing and lending during the Vedic period. Such activities, however, were centred in temples and other religious places. Borrowing and lending gave way to banking during the period of Manu, who believed that wise men should deposit money with a person bearing good moral character, having respectable and rich relatives, and well conversant with law. Koutilya's Artha Shastra also suggests the existence of banking and payment of interest on deposits in the Vedic period.

During the Mughal period, there were different types of gold coins in circulation that encouraged people to engage in monetary transactions and profit-motivated financial activities. Many individuals and some families attained special reputation in trading and in finance. One such family, that of jagat sheth, had branches of its monetary business in dhaka, Hughli and murshidabad. Mughal rulers patronised the banking business of Jagat Sheth family and others, and also used to borrow money from them when needed. People could convert their valuables, mostly gold and silver, into currency with minimum cost at Mughal mints. Monetary transactions and transfer through hundi (bill of exchange), along with cash transaction, was in vogue during the Mughal period. The revenue received from zamindars and dues therefrom were sent to the government treasury through family-based financial or banking institutions. People from different classes were also involved in monetary trading which helped the evolution of banking in that period. A major landmark was the establishment of the Hindustan Bank in 1700 AD at calcutta. After the stewardship of Bengal, Bihar and Urissha was assumed by the east india company, Jagat Sheth's family and other traders in money and finance suffered great losses in their business because of the activities of a new elite subservient to British rulers. The decline in banking brought some instability in the economy of that time and, upon quick realisation of the fact, the British set up the English Agency House.

Established in 1784, the Bengal Bank was the first British-patronised modern bank in India. Dhaka Bank started to operate as a commercial bank in 1806. The Bengal Bank opened its first branch in Dhaka by purchasing Dhaka Bank in 1862. In 1873, it opened its two branches in sirajganj and chittagong. Another branch of Bengal Bank was opened in chandpur in 1900. Six branches of Bengal Bank were in operation in the Bangladesh region until the partition of bengal in 1947 and these branches were located at Dhaka, Chittagong, mymensingh, rangpur, Chandpur and narayanganj.

The three Presidential banks that followed the establishment of the Bengal Bank were the Bank of Calcutta (1806), Bank of Bombay (1840) and Bank of Madras (1843). Combining these three banks, the Imperial Bank of India was set up in 1921. The Reserve Bank of India came into being in 1935. In addition to the above, there were other banking and financial institutions throughout British India, including the territory of Bengal. Other banking institutions established in East Bengal during the British period were the loan offices at Faridpur (1865), Bogra (1872), Barisal (1873), Mymensingh (1873), Nasirabad (1875), Jessore (1876), Munshiganj (1876), Dhaka (1878), Sylhet (1881), Pabna (1882), Kishoreganj (1883), Noakhali (1885), Khulna (1887), Madaripur (1887), Tangail (1887), Nilphamari (1894) and Rangpur (1894). Banks established in this period included the Kurigram Bank (1887), Kumarkhali Bank (1896), Mahaluxmi Bank, Chittagong (1910), Dinajpur Bank (1914), Comilla Banking Corporation (1914) and Comilla Union Bank (1922). Major Indian banks of the period having branches in the territory were the National Bank of India (1864), Bengal Central Bank (1918), New Standard Bank (1920), Imperial Bank of India (1921), Pioneer Bank (1923), Bank of Commerce (1929), United Industrial Bank (1940), Habib Bank (1941) and United Commercial Bank (1942).

After the birth of Pakistan in 1947, the State Bank of Pakistan, the central bank of the country, came into being in 1948. Later, the National Bank of Pakistan, a commercial bank was set up in 1949. In all, 36 scheduled commercial banks were in operation throughout Pakistan. Pakistanis owned most of these banks. Only three of them, namely, National Bank of Pakistan, Habib Bank, and the Australasia Bank had a branch in East Pakistan in 1949. During 1950-58, three other Pakistani-owned banks, the Premier Bank, Bank of Bawalpur and Muslim Commercial Bank had opened branch offices in East Pakistan. Four Pakistani-owned banks, the United Bank, Union Bank, Standard Bank and Commerce Bank conducted business in the province during 1959 - 1965. The province had only two banks owned by local business groups and with headquarters at Dhaka, the Eastern Mercantile Bank (now pubali bank) and Eastern Banking Corporation (now uttara bank), established in 1959 and 1965 respectively.

The banking system in the territory of Bangladesh grew slowly during the British and Pakistan periods. There were only 25 bank branches in 1901 and the number grew to 668 in 1946. Creation of Pakistan was a deterrent in the sector as was evidenced by the closure of bank branches, which came down to 148 in 1950. In 1965, the number rose again to 545. Subsequent years, however, showed dramatic changes in the situation and the number of bank branches increased to 1,025 in 1970. The banking system in Bangladesh started functioning with 1,130 branches of 12 banks inherited from Pakistan. Subsequently, these banks were nationalised and renamed after being merged into six banks. The new names of the banks were the sonali bank (The National Bank of Pakistan, The Bank of Bawalpur, The Premier Bank), agrani bank (Habib Bank, Commerce Bank), janata bank (United Bank, Union Bank), Rupali Bank (Muslim Commercial Bank, Standard Bank), pubali bank (Australasia Bank, Eastern Mercantile Bank) and Uttara Bank (Eastern Banking Corporation).

bangladesh bank, the central bank of the country, was set up on 16 December 1971 by the Bangladesh Bank Order 1972. The government accepted the assets and liabilities of the Deputy Governor's office of the State Bank of Pakistan in Dhaka and declared the Bangladesh Bank as a fully effective and permanent central bank.

Bangladesh Bank is empowered to regulate the issue of currency, maintain reserves, and manage the monetary and credit system with a view to stabilising domestic currency, maintaining a high level of production, reducing unemployment, and increasing real income. It is also responsible for fostering the growth and development of the country's productive resources. The bank has the responsibility of overseeing and regulating the country's banking system. In addition, the head office at Dhaka, Bangladesh Bank has nine branch offices, two in Dhaka city (Motijheel and Sadarghat) and one each in Chittagong, Khulna, Rajshahi, Sylhet, Bogra, Rangpur and Barisal. The paid up capital of Bangladesh Bank is Tk 30 million divided into 300,000 shares of Tk 100 each. The total share capital is fully paid by the government. A nine-member board of directors headed by a Governor as the chief executive oversees the affairs of the bank.

To conduct banking in Bangladesh, all banks have to have licenses from the Bangladesh Bank under the Bank Companies Act 1991. To be able to get a license, all intending banks have to be registered with the Registrar of Joint Stock Companies under the companies act 1994, and collect Certificate of Incorporation. Moreover, to collect capital through public offerings of shares, intending banks have to obtain permission from the country's securities and exchange commission.

Banking institutions in Bangladesh can be classified under different groups. Most banks fall under the category of branch banking ie, the banks operate through branches at home and abroad under the control of their head offices. Foreign branches of Bangladeshi banks have to abide by home country regulations. Under the ownership-based classification, banks in Bangladesh are classified as government/nationalised, private, foreign, and joint ownership banks. The country had 6 nationalised commercial banks (NCB) until 1983, when one of them, the Rupali Bank was denationalised. Another government bank, the Pubali Bank, was denationalised in 1986.

Domestic private banks are the Uttara Bank Limited (estd. 1972, converted to privatisation in 1983), Pubali Bank Limited (estd. 1972), Finance and Investment Bank (ific bank, estd. 1976), islami bank bangladesh (1983), united commercial bank (1983), city bank (1983), national bank (1983), arab bangladesh bank (1985), al baraka bank (1987), eastern bank (1992), national credit and commerce bank (1993), prime bank (1995), south-east bank (1995), dhaka bank (1995), al-arafah islami bank (1995), social investment bank 1995), premier bank (1996), dutch-bangla bank (1996), mercantile bank (1999), standard bank (1999), one bank (1999), export import bank (1999), bangladesh commerce bank (1999), mutual trust bank (1999), trust bank (1999), bank asia (1999) and first security bank (1999). The three NCBs now operating in the country are the Sonali Bank, Janata Bank and Agrani Bank. There is a special group of nationalised banks known as specialised or development financial institutions to support specific economic purposes of the country. These include two for agricultural development, the bangladesh krishi bank (estd. 1973) and rajshahi krishi unnayan bank (estd. in 1987 with branches of Bangladesh Krishi Bank in Rajshahi division), one for industrial development, the bangladesh shilpa bank (estd. 1972) and one for supporting unemployed youths in their self-employment activities, the employment bank (estd.1997). Bangladesh Development Bank Limited was established on 1st January 2010. At present (2010), there are four specialised bank in the country.

Foreign private banks which have branches in Bangladesh are the standard chartered bank, state bank of india, credit agricole indosuez, Hongkong and Shanghai Banking Corporation (hsbc), national bank of pakistan, habib bank, and Commercial Bank of Ceylon Limited (2003). a n z grindlays bank and american express bank was marched with Standard Chartered Bank in 2002 and 2005 respectively. So they have no more activities in Bangladesh. In 2005, Bank of Al-Arafah started their activities in Bangladesh. Presently (2010), there are nine foreign banks working in the country.

There is no independent merchant bank, investment bank or exchange bank in Bangladesh. However, some commercial banks carry out merchant banking in addition to their usual banking activities. Recently, the Securities and Exchange Commission of the country issued permission to 25 financial institutions to do merchant banking. Commercial and specialised banks invest their funds in different sectors of the economy. A total of 22 private leasing companies and financial institutions were given permission to conduct investment activities in various sectors of the economy. Some branches of both nationalised and private commercial banks have been permitted to conduct foreign exchange business under the Foreign Exchange Regulation Act 1947. Such banks are called authorised dealers and their club or association bears the name BAFEDA - Bangladesh Foreign Exchange Dealers Association. Apart from the authorised dealers, more than 400 Money Changers throughout the country are engaged in buying and selling of foreign exchange.

Depending upon the relationship with and the degree of control of the Bangladesh Bank banks in Bangladesh are divided into scheduled and non-scheduled banks. Scheduled banks are enlisted by the Bangladesh Bank under the provisions of section 37 of the Bangladesh Bank Order 1972. They are promise bound to obey central bank instructions, rules and regulations especially, those relating to required capital and provisions, statutory liquidity reserves, audited returns etc. Through scheduling, banks gain special status and enjoy some special facilities from the central bank such as re-discounting, participation in the money market, membership of the clearing house and deposit insurance scheme. Non-scheduled banks do not enjoy such privilege. The list of non-scheduled banks in Bangladesh includes the Eden Bank, Saidpur Commercial Bank, Comilla Co-operative Bank, Dinajpur Industrial Bank, Rajshahi Bank, Shankar Bank, Faridpur Banking Corporation and Madaripur Commercial Bank.

Banks in Bangladesh have correspondent relationship with other banks in foreign countries in order to sell their services or to purchase services from them. Their share in total bank deposits on 31 March 2000 was 57.28%, while that of domestic private banks, foreign private banks, and the specialised banks was 29.01%, 8.42% and 5.29% respectively. The share of NCBs, domestic private banks, foreign private banks and specialised banks in advances on the same date was 51.66%, 29.25%, 6.03% and 13.06% respectively.

A major change was occurred in the sharing during the last decade scenario of the category wise inter-bank assets and liabilities arrangement due to many reasons including the banking sector reform, creation of more competitive environment and opening of more branches of private banks. The deposit of state-owned banks during the fiscal 2009-10 was reduced to 35% from 58% of the whole deposit of 2000. On the other hand, the deposit of private commercial banks rose from 30% to 53% over the same period. Similarly the volume of assets owned by the government owned bank declined from 52% share of the total assets to only 32% and during the some period, the share of assets owned by private bank was increased to 50% from 29%.

Laws that directly regulate the banking system of Bangladesh are: Bangladesh Bank Order 1972; Bank Company Act, 1991; Bangladesh Bank (Nationalisation) Order 1972; Companies Act 1913 and 1994; Deposit Insurance Order 1984; Bankruptcy Act 1997; Insolvency Act 1920; Financial Court Act 1990; Foreign Exchange (Regulation) Act 1986; Financial Institutions Act 1993; Financial Institutions Rules 1994; and Co-operative Societies Ordinance 1984.

Laws that indirectly influence the banking system and for which references are made in the Banking Company Act 1991 are: Code of Civil Procedure 1898; Code of Criminal Procedure 1898; Evidence Act 1872; General Clauses Act 1897; Limitations Act 1908; Negotiable Instruments Act 1881; Penal Code 1860; Trust Act 1882; Transfer of Property Act; and Bangladesh Chartered Accountant Order 1973.

Modernisation of banking system was essential to cope with the fast changing world economic order. In Bangladesh, a massive change was done throughout the first decade of the present century to build up a timely, modern, skilled and international standard banking system through banking system reforms, technological modernisation and improvement the standard of services. All the state-owned scheduled banks have been turned into Public Limited Companies. Most of privates and a few of public banks introduced epoch-making measures like introduction of ATM booth and on-line banking system. All steps were taken up to runs the banks to maintain the Basel-2 standard. The Bank Company (Amendment) Ordinance 2007 was promulgating updating the Bank Company Act to widen the scope and opportunity of bangladesh bank to supervision the activities of scheduled banks. The Money Laundering Prevention Act, 2002 was updated and modernised in accordance with the existing international laws and rules and the amended ordinance was promulgated in 2008. [Abul Kalam Azad]