Commercial banks have been playing an important role in the economic development of Bangladesh. They provide investible funds to both the public sector, and specially the private sector. Further, banks have played a significant role in respect of the four major drivers of economic growth in Bangladesh as discussed above.
The banking sector, however, is faced with various challenges, which include among others, weak management, poor governance, lack of strong leadership, and non-compliance with ethical standards leading to various types of banking scams such as money laundering and Non-Performing Loans (NPLs).
Bangladesh is an import-dependent country. It needs to import raw materials, accessories and machineries to foster development of the industrial sector, including the RMG sector. Banks have been facilitating payment, finance and risk management services to the sector.
In 2017 the private commercial banks' (PCBs) share in export finance was the highest (60 per cent) followed by state owned commercial banks (SoCBs). Within the apparel sector, the RMG sector received the highest proportion of financing from banks, and the volumes and proportions have increased between 2014 and 2017. Import payments have been increasing over the years. The total import payments (c & f), including imports of EPZ, increased more than two times from US$21,629 million during 2007-08 to US$43,663.0 million during 2016-17.
Banks play a major role in facilitating remittances by migrant workers. During 2010-11 and 2016-17, the country received lower remittances than in the past; and the amounts remitted through banking channels likewise declined. However, Bangladesh received higher remittances during the last fiscal year resulting from a strong pick-up in global economic activities, especially in the Middle East countries. The major factors contributing to higher remittances through the banking channels during the last fiscal year are: (a) depreciation of the BDT against US$; (b) higher rate offered by local banks; (c) many banks, facing shortage of US$ for the last few months due to increase in import payments against decline in export earnings, have intensified their efforts to increase remittance inflows through their respective channels; and (d) Bangladesh Bank's (BB) strengthened surveillance on hundi -- the illegal outlet that many migrant workers use to send money home.
Given the importance of the agriculture sector, the government has given highest priority to agriculture and its allied sectors for adequate credit with low cost. Between 2013 and 2017, banks' loan disbursement exceeded the target; and the crop sub-sector received about one-half of total agricultural credit, followed by livestock and other agriculture activities.
Private Commercial Banks (PCBs) accounted for the largest share of agricultural credit followed by Specialised Banks (SBs), State-owned Commercial Banks (SoCBs) and Foreign Commercial Banks (FCBs) (Bangladesh Bank Annual Reports). Between 2001-02 and 2017-18, the Bangladesh Krishi Bank's total disbursement to the agriculture sector increased more than five times from BDT 15.63 billion to BDT 82.15 billion; and its total disbursement to the crop production sub-sector increased by about 3.6 times from BDT 8.59 billion to BDT 30.62 billion. During FY17, the SoCBs, PCBs, FCBs and SBs provided credit of BDT 210 billion, exceeding the target of BDT 175.50 billion. The FCBs and the PCBs exceeded their targets by about 44 per cent and 36 per cent respectively.
Between 2007 and 2017, the share of short-term loans was greater than that of long-term loans, and the gap has been widening during the past five years (Siddique et.al. 2018). In FY17, about 82 per cent of disbursement was in the form of short-term lending, and the rest was in the form of long-term loans for purchase of agricultural machineries, irrigation equipment and livestock. Credits for crop production and poverty alleviation programmes accounted for about 59 per cent and 11 per cent respectively of total short-term loans. Around 3.86 million farmers received agricultural and rural credit. Around 3 million small and marginal farmers received about BDT 150 billion agricultural loans from different banks. Over 8700 farmers in the less-developed areas (haor, char, etc.) received about BDT 0.4 billion of agricultural and rural credit. More than 19,000 farmers in the three hill districts received around BDT 0.5 billion at only 5.0 per cent interest rate. About BDT 4.0 billion was disbursed among about 0.12 million farmers through over 15,000 open credit disbursement programs arranged by different banks. The BB undertook a special refinance scheme under which it provided BDT 5.62 billion credit through BRAC to 0.15 million share-croppers with limited access to banks. Also, the BB undertook special refinance schemes for the jute and dairy farming sectors (Bangladesh Bank Annual Report 2018).
To ensure adequate funding for SMEs, the Bangladesh Bank in 2010 formulated the "SME Credit Policies and Programmes" aimed at helping SMEs in achieving sustainable inclusive growth. Under this programme, the BB does not impose targets on commercial banks and non-financial institutions (NBFIs); rather the targets are independently decided by them. Since 2012, both the targets and actual disbursements have been increasing. During FY17, while the target was BDT 1338.6 billion, BDT 1439.7 billion was disbursed by all banks and NBFIs among 697,000 cottage, micro, small and medium sized enterprises. Women-led entrepreneurs received special emphasis, with 49,000 of them receiving BDT 45.1 billion.
The BB has been encouraging all banks and NBFIs to grant loans to women entrepreneurs at reduced interest rate (9 per cent). Also, it set up a dedicated women entrepreneur desk and instructed all banks and NBFIs to do the same, reserve 15 per cent of the SME funds exclusively for women entrepreneurs, provide credit to new women entrepreneurs in this sector, and sanction loans of at least BDT 2.5 million to women entrepreneurs with only personal guarantee but no collateral under its refinance facilities. At the end of June 2017, BDT 20.3 billion was refinanced to 19,098 women-led enterprises.
CONCLUSION AND RECOMMENDATIONS: Banks have contributed considerably in the process of economic growth of Bangladesh. However, their contribution would have been greater, if they had effectively addressed various challenges faced by the banking sector such as weak management, poor governance, lack of strong leadership, and non-compliance with ethical standards leading to various types of banking scams such as money laundering and NPLs.
Alternative:
Commercial banks have been playing an important role in the economic development of Bangladesh. They provide investible funds to both the public sector, and specially the private sector. Further, banks have played a significant role in respect of the four major drivers of economic growth in Bangladesh as discussed above.
The banking sector, however, is faced with various challenges, which include among others, weak management, poor governance, lack of strong leadership, and non-compliance with ethical standards leading to various types of banking scams such as money laundering and Non-Performing Loans (NPLs).
Bangladesh is an import-dependent country. It needs to import raw materials, accessories and machineries to foster development of the industrial sector, including the RMG sector. Banks have been facilitating payment, finance and risk management services to the sector.
In 2017 the private commercial banks' (PCBs) share in export finance was the highest (60 per cent) followed by state owned commercial banks (SoCBs). Within the apparel sector, the RMG sector received the highest proportion of financing from banks, and the volumes and proportions have increased between 2014 and 2017. Import payments have been increasing over the years. The total import payments (c & f), including imports of EPZ, increased more than two times from US$21,629 million during 2007-08 to US$43,663.0 million during 2016-17.
Banks play a major role in facilitating remittances by migrant workers. During 2010-11 and 2016-17, the country received lower remittances than in the past; and the amounts remitted through banking channels likewise declined. However, Bangladesh received higher remittances during the last fiscal year resulting from a strong pick-up in global economic activities, especially in the Middle East countries. The major factors contributing to higher remittances through the banking channels during the last fiscal year are: (a) depreciation of the BDT against US$; (b) higher rate offered by local banks; (c) many banks, facing shortage of US$ for the last few months due to increase in import payments against decline in export earnings, have intensified their efforts to increase remittance inflows through their respective channels; and (d) Bangladesh Bank's (BB) strengthened surveillance on hundi -- the illegal outlet that many migrant workers use to send money home.
Given the importance of the agriculture sector, the government has given highest priority to agriculture and its allied sectors for adequate credit with low cost. Between 2013 and 2017, banks' loan disbursement exceeded the target; and the crop sub-sector received about one-half of total agricultural credit, followed by livestock and other agriculture activities.
Private Commercial Banks (PCBs) accounted for the largest share of agricultural credit followed by Specialised Banks (SBs), State-owned Commercial Banks (SoCBs) and Foreign Commercial Banks (FCBs) (Bangladesh Bank Annual Reports). Between 2001-02 and 2017-18, the Bangladesh Krishi Bank's total disbursement to the agriculture sector increased more than five times from BDT 15.63 billion to BDT 82.15 billion; and its total disbursement to the crop production sub-sector increased by about 3.6 times from BDT 8.59 billion to BDT 30.62 billion. During FY17, the SoCBs, PCBs, FCBs and SBs provided credit of BDT 210 billion, exceeding the target of BDT 175.50 billion. The FCBs and the PCBs exceeded their targets by about 44 per cent and 36 per cent respectively.
Between 2007 and 2017, the share of short-term loans was greater than that of long-term loans, and the gap has been widening during the past five years (Siddique et.al. 2018). In FY17, about 82 per cent of disbursement was in the form of short-term lending, and the rest was in the form of long-term loans for purchase of agricultural machineries, irrigation equipment and livestock. Credits for crop production and poverty alleviation programmes accounted for about 59 per cent and 11 per cent respectively of total short-term loans. Around 3.86 million farmers received agricultural and rural credit. Around 3 million small and marginal farmers received about BDT 150 billion agricultural loans from different banks. Over 8700 farmers in the less-developed areas (haor, char, etc.) received about BDT 0.4 billion of agricultural and rural credit. More than 19,000 farmers in the three hill districts received around BDT 0.5 billion at only 5.0 per cent interest rate. About BDT 4.0 billion was disbursed among about 0.12 million farmers through over 15,000 open credit disbursement programs arranged by different banks. The BB undertook a special refinance scheme under which it provided BDT 5.62 billion credit through BRAC to 0.15 million share-croppers with limited access to banks. Also, the BB undertook special refinance schemes for the jute and dairy farming sectors (Bangladesh Bank Annual Report 2018).
To ensure adequate funding for SMEs, the Bangladesh Bank in 2010 formulated the "SME Credit Policies and Programmes" aimed at helping SMEs in achieving sustainable inclusive growth. Under this programme, the BB does not impose targets on commercial banks and non-financial institutions (NBFIs); rather the targets are independently decided by them. Since 2012, both the targets and actual disbursements have been increasing. During FY17, while the target was BDT 1338.6 billion, BDT 1439.7 billion was disbursed by all banks and NBFIs among 697,000 cottage, micro, small and medium sized enterprises. Women-led entrepreneurs received special emphasis, with 49,000 of them receiving BDT 45.1 billion.
The BB has been encouraging all banks and NBFIs to grant loans to women entrepreneurs at reduced interest rate (9 per cent). Also, it set up a dedicated women entrepreneur desk and instructed all banks and NBFIs to do the same, reserve 15 per cent of the SME funds exclusively for women entrepreneurs, provide credit to new women entrepreneurs in this sector, and sanction loans of at least BDT 2.5 million to women entrepreneurs with only personal guarantee but no collateral under its refinance facilities. At the end of June 2017, BDT 20.3 billion was refinanced to 19,098 women-led enterprises.