Bank Management

Chaper-1: Introduction

Origin of the word “BANK”: Generally it is assumed that the word “BANK” was probably
derived from the word “BENCH”. Because during the ancient time people used to do money-
lending business sitting on long bench. There are at least three schools of thought who give their
separate opinion about the origin of word “Bank”. Some of the economists believe that the word
bank originates from the German word BANC meaning a joint stock firm. The second school of
thought believes that the word bank has been derived from the Italian word ‘BANCO’ which
means heap or mound. There are another group of people who traces the origin of the word bank
to the Greek word “BENQUE” meaning a bench.
According to prof. chamber the word BANK came from the Italian word ‘Banco’ and French
word ‘Banque.

BANC/ BANCO BANQUE BANK

Finally we can say that with the passage of time the word Banco, Banc or Banque becomes
Bank.

Definition of Bank: Bank is a financial institution that collects surplus cash from society and
gives a part of that as a loan to investors for earning profit. More precisely bank is a financial
intermediary that accepts deposits and channels those deposits into lending activities, either
directly through by loaning or indirectly through capital market. That is, a bank established
relationship between the customer that have capital surplus and the customer that have capital
deficit.
According to American Institution of Bankers- “A bank provides service activity and acts as an
intermediary between creditor and lender.”
According to Dictionary of Banking and Finance “Bank is an institution that is registered by
central bank and mainly performs the following activities:
• Receives current deposits and give the withdrawal facilities to clients through cheque.
• Receive term deposits and pay interest on them.
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• Discounting notes, approving loans, and invest in government and other credit
instrument.
• Collect cheque, draft and note etc.
• Notification of depositor’s cheque.
• Acts as a trustee in accordance with government permission.

Bank Creditors
Depositors

Interest Interest

So at last we say that bank is a business/financial institution that receives surplus funds of
individual, trading or non-trading institution, government or private institution as deposits and
supply money with assurance of repayment against security in exchange of profit or interest to
trading or non-trading institution who has deficit fund and demand for money.

Origin and Historical Evaluation of Bank: Really it is very difficult to say about the origin and
historical evaluation of Bank. But it is sure that the development of bank is performed step by
step. Historical evaluations of bank are discussed below:

As early as 2000 B.C. Babylonians had developed a system for depositing their extra money
which was known as Bank. That is, the history of banking begins with the first proto type banks
of merchants of the ancient world which made grain loans to farmers and traders who carried
goods between two cities. This began around 2000B.C. in Babylonian.

In 1157 the bank of Venice was established which was the first public banking institution.
Originally it was not a bank in modern sense, rather an office for transferring public debt.

History shows the existence of a ‘Monte’ in Florence in 1336. The meaning of ‘Monte’ is given
in Italian dictionary as- a standing bank or mount of money, as they have in diverse cities of
Italy.
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As early as 1349 the business of the banking was carried on by the drapers of Barcelona. During
1401 a public bank was established in Barcelona. It used to exchange money, receive deposits
and discount bills of exchange both for citizens and foreigners.

In 1407 the bank of Genoa was established. It accepted all kinds of deposits which could be
drawn on demand or transferred from the account of one person to another. It is one of the
greatest banks of the century at that time.

The bank of England was established in 1694 in England but the development of modern
commercial banking institution was started only when banking act of 1833 was passed.

However it was only in 19th century when the modern joint stock commercial banking system
developed in most of the lending countries of the world.

In ancient India, the joint stock companies’ act 1850 was the first legislative enactment which
permitted the corporate sector to come into the banking business as per provisions of the act. The
first bank to be established under this act was the Oudh commercial bank in 1881 followed by
Punjab national bank in 1895 and People’s bank in 1901.

Banking History in Bangladesh: Banking in Bangladesh is as old as banking in other parts of

the world. Today’s banking system has evolved primarily from British banking through it has
undergone substantial changes in post-liberation period.

After the emergence of Bangladesh in 1971 Bangladesh Bank was established in 1972 which is
the successor bank of state bank of Pakistan. It is wholly government- owned bank managed by a
board appointed by the government.

Again after the achievement of victory against pak-occupation forces on 16th December 1971,
there were 12 scheduled banks operating in Bangladesh. All these banks were established by
west Pakistanis and their head offices were in West Pakistan.

Nationalized Commercial Banks (NCBs) were established in Bangladesh in 1972 through

amalgamation of twelve commercial banks that were operating in pre-independent Bangladesh.

The Bangladesh government initially nationalized the entire domestic banking system and
proceeded to reorganize and rename the various banks. Foreign-owned banks were permitted to
continue doing business in Bangladesh.

The policy of the government regarding economic management has changed since 1976 from
which year private sector has been entrusted to play a bigger role in the economy than before.
Accordingly, to encourage private sector and to create competition in the banking sector,
government decided to allow setting-up of local private commercial banks in addition to
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nationalized commercial banks operating in the country. Few private commercial banks were
allowed to operate in the country in 1981.

In Bangladesh first private bank was incorporated in 1983. On that time govt. approved some
commercial bank to operate their activities which are IIBL, ABBL, NBL and IFIC bank.

After enactment of Banking Company act-1991, banking business becomes popular in

Bangladesh. In 1991 govt. again approved some commercial and specialized banks such as DBL,
NCCBL etc. In this way various political govt. in our country approved different banks in
different time. Now there are 66 banks in our country which have various natures.

• 1981-1990, 9 private commercial banks

• 1991-1996, 8 private commercial banks
• 1996-2001, 13 private commercial banks
• 2009 till today 14 private commercial banks

Nationalization of Bank: Immediately after the govt. of Bangladesh consolidated its authority,
it decided to adopt a socialistic pattern of society. This means a society with wealth distributed as
possible was adopted as the state policy of the government for newly created state of
Bangladesh. In order to implement the above mentioned state policy, the govt. of Bangladesh
decided to nationalize all the banks of the country. Accordingly on the 26th March, 1972, the
Bangladesh Bank (Nationalization) order 1972, (president’s order no.26 of 1972) was
promulgated. All the existing 12 banks were nationalized and were taken over by the government
under the president’s order.

Under Article 4 of the nationalizing law, six new banks have been constituted with all the legal
characteristics of body corporate. Each of the new banks has common seal and perpetual
succession and subject to the prevision of the law each new bank is empowered to acquire, hold,
and dispose of the property, to contract and to sue and be sued in its own name. the undertakings
of existing banks specified below stand transferred to and vested in, the new banks mentioned
against them.

Nationalized Banks Amalgamated and rename after nationalization

• National Bank of Pakistan Sonali Bank
• Bank of Bahawalpur Limited
• Premier Bank Limited
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• United Bank Limited Janata Bank

• Union Bank Limited
• Habib Bank Limited Agrani Bank
• Commerce Bank Limited
• Muslim commercial Bank Limited Rupali Bank
• Standard Bank Limited
• Australasia Bank Limited
Eastern Mercantile Bank Limited Pubali Bank
Eastern Banking corporation Limited Uttara Bank

Objectives of Nationalization: Objectives of nationalizing commercial banks are outline below:

• To ensure that banking system serves a much wider section of the community by
dispensing credit to the poorest and weaker sections of the society.
• Remove the regional disparities.
• Help in development of backward areas.
• Serve better the needs of development of the economy in conformity with national policy
and objectives formulated by govt.
• Improving our rural economy for socio-economic upliftment by boosting up production
activities in the rural sectors so as to raise the income level and living standard of the
rural inhabitants.

Banks in Bangladesh

Banks After the independence, banking industry in Bangladesh started its journey with 6 Nationalized
commercialized banks, 3 State owned Specialized banks and 9 Foreign Banks. In the 1980's banking industry
achieved significant expansion with the entrance of private banks. Now, banks in Bangladesh are primarily of two
types:

• Scheduled Banks:
The banks that remain in the list of banks maintained under the Bangladesh Bank Order, 1972.
• Non-Scheduled Banks:
The banks which are established for special and definite objective and operate under any act but are not
Scheduled Banks. These banks cannot perform all functions of scheduled banks.

There are 62 scheduled banks in Bangladesh who operate under full control and supervision of Bangladesh Bank
which is empowered to do so through Bangladesh Bank Order, 1972 and Bank Company Act, 1991. Scheduled
Banks are classified into following types:

1. State Owned Commercial Banks (SOCBs): There are 6 SOCBs which are fully or majorly owned by the
Government of Bangladesh.
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2. Specialized Banks (SDBs): 3 specialized banks are now operating which were established for specific
objectives like agricultural or industrial development. These banks are also fully or majorly owned by the
Government of Bangladesh.
3. Private Commercial Banks (PCBs): There are 43 private commercial banks which are majorly owned by
individuals/the private entities. PCBs can be categorized into two groups:
1. Conventional PCBs: 33 conventional PCBs are now operating in the industry. They perform the
banking functions in conventional fashion i.e interest based operations.
2. Islami Shariah based PCBs: There are 10 Islami Shariah based PCBs in Bangladesh and they
execute banking activities according to Islami Shariah based principles i.e. Profit-Loss Sharing
(PLS) mode.
4. Digital Commercial Banks: There is 1 digital commercial bank [yet not granted permission for Commercial
Operation] which is owned by individuals/private entities. It is a digital bank with no branches.
5. Foreign Commercial Banks (FCBs): 9 FCBs are operating in Bangladesh as the branches of the banks
which are incorporated in abroad.

There are now 5 non-scheduled banks in Bangladesh which are:

1. Ansar VDP Unnayan Bank,

2. Karmashangosthan Bank,
3. Grameen Bank,
4. Jubilee Bank,
5. Palli Sanchay Bank

Banks versus Finance Companies

FCs
Finance Companies (FCs) are those types of financial institutions which are licensed under the ফাইন%া&
'কা)ানী আইন, ২০২৩ (the Finance Company Act, 2023) and regulated and supervised by the Bangladesh Bank.
At present, 35 FCs are operating in Bangladesh while the first one was established in 1981. Out of the total, 2 is
fully government owned, 1 is subsidiary of a state-owned commercial bank, 2 are jointly owned by the government
and foreign government entities, 19 are established by private domestic entrepreneurs and 11 are joint ventures of
domestic and foreign entrepreneurs. Major sources of funds of FCs are Term Deposits (at least three months
tenure), Credit Facility from Banks and other FCs, Call Money as well as Bond and Securitization.

The major difference between banks and FCs are as follows:

1. FCs cannot issue cheques, pay-orders or demand drafts.
2. FCs cannot receive demand deposits,
3. FCs cannot be involved in foreign exchange financing,
FCs can conduct their business operations with diversified financing modes like syndicated financing, bridge
financing, lease financing, securitized instruments, private placement of debt and equity etc.

Bangladesh Bank:
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Bangladesh Bank is the central bank of Bangladesh. It was established on 16th December 1971
under the Bangladesh Bank (temporary) order1971n (Subsequently substituted by the
presidential order no. 127 of 1972). The powers and functions of Bangladesh Bank are governed
by Bangladesh Bank order 1972 and Banking companies’ act 1991.
The bank is run according to the direction of the government. The chief executive, the governor
and his deputies as well as the bank’s policy making body board of directors are all appointed by
the government. Bangladesh Bank has 10 branches. 2 branch office in Dhaka (one in Motijheel
and another is in Sadarghat) and other branches in Barishal, Chittagong, Rangpur, Sylhet, Bogra,
Khulna, Rajshahi and Mymnsynha.
With the recommendation of World Bank /IMF, govt. in 2003 provided some degree of
autonomy to the bank to carry out its responsibilities without undue interference of the
government and a new body called co-ordination council headed by ministry for finance with
ministry of commerce , governor of Bangladesh Bank, secretary of finance divisions, secretary of
international resource division, member of planning commission as the member has been set up
to oversee the Bangladesh Bank’s fiscal, monetary and exchange rate policies.

Functions of Bangladesh Bank:

The Bank which builds up banking system and money market is a central bank.
Bangladesh bank is the central bank in our country which functions are briefly
outlined below:

• Formulation and implementation of monetary and credit policies.

• Regulation and supervision of banks and non-bank financial institutions,
promotion and development of domestic financial markets.
• Management of the country's international reserves.
• Issuance of currency notes.
• Regulation and supervision of the payment system.
• Acting as banker to the government.
• Money Laundering Prevention.
• Collection and furnishing of credit information.
• Implementation of the Foreign exchange regulation Act.
• Managing a Deposit Insurance Scheme .
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Methods of Credit Control used by Central

Bank

The two categories are: I. Quantitative or General Methods

II. Qualitative or Selective Methods.

Category # I. Quantitative or General Methods:

1. Bank Rate Policy:

The bank rate is the rate at which the Central Bank of a country is
prepared to re-discount the first class securities.

It means the bank is prepared to advance loans on approved

securities to its member banks.

As the Central Bank is only the lender of the last resort the bank
rate is normally higher than the market rate.

For example:
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If the Central Bank wants to control credit, it will raise the bank
rate. As a result, the market rate and other lending rates in the
money-market will go up. Borrowing will be discouraged. The
raising of bank rate will lead to contraction of credit.

Similarly, a fall in bank rate mil lowers the lending rates in the
money market which in turn will stimulate commercial and
industrial activity, for which more credit will be required from the
banks. Thus, there will be expansion of the volume of bank Credit.
2. Open Market Operations:

This method of credit control is used in two senses:

(i) In the narrow sense, and

(ii) In broad sense.

In narrow sense—the Central Bank starts the purchase and sale of

Government securities in the money market. But in the Broad
Sense—the Central Bank purchases and sale not only Government
securities but also of other proper and eligible securities like bills
and securities of private concerns. When the banks and the private
individuals purchase these securities they have to make payments
for these securities to the Central Bank.

This gives result in the fall in the cash reserves of the Commercial
Banks, which in turn reduces the ability of create credit. Through
this way of working the Central Bank is able to exercise a check on
the expansion of credit.

Further, if there is deflationary situation and the Commercial Banks

are not creating as much credit as is desirable in the interest of the
economy. Then in such situation the Central Bank will start
purchasing securities in the open market from Commercial Banks
and private individuals.

With this activity the cash will now move from the Central Bank to
the Commercial Banks. With this increased cash reserves the
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Commercial Banks will be in a position to create more credit with

the result that the volume of bank credit will expand in the
economy.
3. Variable Cash Reserve Ratio:

Under this system the Central Bank controls credit by changing the
Cash Reserves Ratio. For example—If the Commercial Banks have
excessive cash reserves on the basis of which they are creating too
much of credit which is harmful for the larger interest of the
economy. So it will raise the cash reserve ratio which the
Commercial Banks are required to maintain with the Central Bank.

This activity of the Central Bank will force the Commercial Banks to
curtail the creation of credit in the economy. In this way by raising
the cash reserve ratio of the Commercial Banks the Central Bank
will be able to put an effective check on the inflationary expansion
of credit in the economy.

Similarly, when the Central Bank desires that the Commercial

Banks should increase the volume of credit in order to bring about
an economic revival in the country. The Central Bank will lower
down the Cash Reserve ratio with a view to expand the cash
reserves of the Commercial Banks.

With this, the Commercial Banks will now be in a position to create

more credit than what they were doing before. Thus, by varying the
cash reserve ratio, the Central Bank can influence the creation of
credit.

Which is Superior?

Either variable cash reserve ratio or open market

operations:

From the analysis and discussions made above of these two

methods of credit, it can be said that the variable cash reserve ratio
method is superior to open market operations on the following
grounds:
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(1) Open market operations is time consuming procedure while cash

reserves ratio produces immediate effect in the economy.

(2) Open market operations can work successfully only where

securities market in a country are well organised and well
developed.

While Cash Reserve Ratio does not require such type of securities
market for the successful implementation.

(3) Open market operations will be successful where marginal

adjustments in cash reserve are required.

But the variable cash reserve ratio method is more effective when
the commercial banks happen to have excessive cash reserves with
them.

These two methods are not rival, but they are complementary to
each other.

Category # II. Qualitative or Selective Method of Credit Control:

The qualitative or the selective methods are directed towards the

diversion of credit into particular uses or channels in the economy.
Their objective is mainly to control and regulate the flow of credit
into particular industries or businesses.

The following are the important methods of credit control

under selective method:

1. Rationing of Credit.

2. Direct Action.

3. Moral Persuasion.

4. Method of Publicity.

5. Regulation of Consumer’s Credit.

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6. Regulating the Marginal Requirements on Security Loans.

1. Rationing of Credit:

Under this method the credit is rationed by limiting the amount

available to each applicant. The Central Bank puts restrictions on
demands for accommodations made upon it during times of
monetary stringency.

In this the Central Bank discourages the granting of loans to stock

exchanges by refusing to re-discount the papers of the bank which
have extended liberal loans to the speculators. This is an important
method of credit control and this policy has been adopted by a
number of countries like Russia and Germany.
2. Direct Action:

Under this method if the Commercial Banks do not follow the policy
of the Central Bank, then the Central Bank has the only recourse to
direct action. This method can be used to enforce both
quantitatively and qualitatively credit controls by the Central
Banks. This method is not used in isolation; it is used as a
supplement to other methods of credit control.

Direct action may take the form either of a refusal on the part of the
Central Bank to re-discount for banks whose credit policy is
regarded as being inconsistent with the maintenance of sound
credit conditions. Even then the Commercial Banks do not fall in
line, the Central Bank has the constitutional power to order for their
closure.

This method can be successful only when the Central Bank is

powerful enough and has cordial relations with the Commercial
Banks. Mostly such circumstances are rare when the Central Bank is
forced to resist to such measures.
3. Moral Persuasion:

This method is frequently adopted by the Central Bank to exercise

control over the Commercial Banks. Under this method Central
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Bank gives advice, then request and persuasion to the Commercial

Banks to co-operate with the Central Bank is implementing its
credit policies.

If the Commercial Banks do not follow or do not abide by the advice

or request of the Central Bank no gross action is taken against
them. The Central Bank merely was its moral influence and
pressure with the Commercial Banks to prevail upon them to accept
and follow the policies.
4. Method of Publicity:

In modern times, Central Bank in order to make their policies

successful, take the course of the medium of publicity. A policy can
be effectively successful only when an effective public opinion is
created in its favour.

Its officials through news-papers, journals, conferences and

seminar’s present a correct picture of the economic conditions of
the country before the public and give a prospective economic
policies. In developed countries Commercial Banks automatically
change their credit creation policy. But in developing countries
Commercial Banks being lured by regional gains. Even the
Bangladesh Bank follows this policy.
5. Regulation of Consumer’s Credit:

Under this method consumers are given credit in a little quantity

and this period is fixed for 18 months; consequently credit creation
expanded within the limit. This method was originally adopted by
the U.S.A. as a protective and defensive measure, there after it has
been used and adopted by various other countries.
6. Changes in the Marginal Requirements on Security Loans:

This system is mostly followed in U.S.A. Under this system, the

Board of Governors of the Federal Reserve System has been given
the power to prescribe margin requirements for the purpose of
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preventing an excessive use of credit for stock exchange

speculation.

This system is specially intended to help the Central Bank in

controlling the volume of credit used for speculation in securities
under the Securities Exchange Act, 1934.