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Muhammad Mustafizur Rahman A thesis submitted in partial fulfillment of the requirements for the degree of Professional Master in Banking and Finance Examination Committee: Dr. Juthathip Jongwanich (Chairperson) Dr. Sundar Venkatesh Dr. Sununta Siengthai Previous Degree: Masters of Business Administration The University of Dhaka Dhaka, Bangladesh Scholarship Donor: Asian Institute of Technology School of Management I would like to convey my profound gratitude to my supervisor, Dr. Juthathip Jongwanich, whose guidance helped me to develop an understanding of the subject. She has supported me throughout my research with patience and vast knowledge without which this research would not be possible. I am very much indebted to Dr. Sundar Venkatesh for his valuable and relentless advices and remarks during the study. I am gratified to the research committee members for their valuable comments and suggestions. I owe my deepest gratitude to my parents and family members. I would not be able to complete the study successfully without their continuous inspiration and encouragement. While carrying out the study, I was blessed with a friendly group of fellow classmates and AIT Extension officials. It is a pleasure to thank all those for their cordial support to complete the research study. Abstract
The aim of this study is to summarize the major reforms undertaken in the banking industry of Bangladesh and to evaluate their impact on the financial development and individual performances of the banks. Development of financial system is measured by financial deepening, competitiveness and profitability within the banking industry. Individual performances of the banks are measured by "Capital Adequacy, Asset Quality, Management Soundness, Earning performance and Liquidity" of the banks. The study reveals that the financial system in Bangladesh has been developed to some extent. However, we observe a mixed result for different types of banks in case of performance evaluation of the banks. While the local banks failed to achieve satisfactory improvement, the foreign banks were able to improve their performance considerably perhaps for having strong and efficient management, and additional compliance with the policy, guidelines, standards issued by their head office. Keywords: Banking sector reform; Financial development; Bank performance; Competitiveness; CAMEL Framework List of Abbreviations
: Bangladesh Bank Order : Bank Companies Act : Banking Control Department : Bank for International Settlement : Bangladesh Krishi Bank : Banking Reform Committee : Banking Regulations & Policy Department : Commercial Banking Problem Analysis and Strategy Study : Commercial Bank Restructuring Project : Credit Information Bureau : Capital to Risk weighted Assets Ratio : Credit Risk Grading System : Cash Reserve Requirement : State-owned Development Financial Institutions : Export Processing Zone : Early Warning System : Foreign Commercial Banks : Financial Sector Reform Program State-owned Commercial Banks : International Accounting Standard : Memorandum of Understanding : Non Bank Financial Institutions : Nationalized Commercial Banks : Non-Performing Loans : Offshore Banking Unit : Organization for Economic Cooperation and Development : Private Commercial Banks : Performance Planning System : Rajshahi Krishi Unnayan Bank : Risk Weighted Assets : Specialized Banks : Statutory Liquidity requirement : Special Mention Account BANKING SECTOR REFORMS IN BANGLADESH AND ITS IMPACT
Chapter 1:
Problem Definition ---------------------------------------------------------------- 1 Objectives of the Study ------------------------------------------------------------ 2 Scope and Limitations ------------------------------------------------------------- 2 Research Methodology ------------------------------------------------------------ 2 Presentation of the Report -------------------------------------------------------- 3
Chapter 2:

Literature Review
Theoretical Rationale of Financial Sector Reform --------------------------- 4 Significance of Banking Sector -------------------------------------------------- 4 Defining Banking Sector Reform ------------------------------------------------ 5 Impact of Banking Sector Reforms: Empirical Evidences ------------------- 5 Theoretical Structure of Performance Evaluation of Banks ----------------- 5 Financial Reforms in South Asia ------------------------------------------------ 6 2.6.1 India ------------------------------------------------------------------------ 6 2.6.2 Pakistan -------------------------------------------------------------------- 6 2.6.3 Sri Lanka ------------------------------------------------------------------ 7 2.6.4 Nepal ----------------------------------------------------------------------- 7
Chapter 3:
Banking Sector Reforms in Bangladesh
Instigation of Reforms ------------------------------------------------------------- 8 Financial Sector Reform Program ---------------------------------------------- 8 BRC/CBRP Restructuring Measures -------------------------------------------- 9 Brief Description of the Reforms --------------------------------------------- 10 3.4.1 Policy Reforms ---------------------------------------------------------- 10 3.4.2 Institutional Reforms ---------------------------------------------------- 12 3.4.3 Legal Reforms ------------------------------------------------------------ 13 Chapter 4:
Impacts of Reforms on Banking Sector in Bangladesh
Impact of Reforms to Financial Development ------------------------------ 15 4.1.1 Financial Deepening ---------------------------------------------------- 15 4.1.2 Competitiveness of the banking industry --------------------------- 18 4.1.3 Profitability of the Banking Industry --------------------------------- 19 Performance Evaluation of Banks -------------------------------------------- 19 4.2.1 Capital Adequacy ------------------------------------------------------- 19 4.2.2 Asset Quality ------------------------------------------------------------- 20 4.2.3 Management Efficiency ------------------------------------------------- 20 4.2.4 Earning Performances -------------------------------------------------- 22 4.2.5 Liquidity ------------------------------------------------------------------- 22
Chapter 5:

Conclusions and Policy Inferences
Policy Inferences ------------------------------------------------------------------ 26 List of References ----------------------------------------------------------------------------------- 29 List of Tables
Title of the Tablet Financial Indicators to Evaluate Bank Performance ------------------------- 3 Selective Indicators of Bangladesh Financial Sector ------------------------ 16 Key Ratios of Financial Indicators --------------------------------------------- 17 Concentration Ratio within the Total Deposit -------------------------------- 18 Herfindahl-Hirschman Index (HHI) ------------------------------------------- 19 Profitability of the Aggregate Banking Industry ----------------------------- 19 Capital to Risk Weighted Assets Ratio by Types of Banks ---------------- 21 Non-Performing Loans to Total Loans Ratio by Types of Banks --------- 21 Expenditure-Income Ratio by Types of Banks ------------------------------- 21 Return on Assets (ROA) by Types of Banks --------------------------------- 23 Return on Equity (ROE) by Types of Banks --------------------------------- 23 Net Interest Income by Type of Banks ---------------------------------------- 23 Liquid Assets/Deposit by Types of Banks ----------------------------------- 24 Excess Liquidity/Deposit by Types of Banks -------------------------------- 24 Chapter 1

1.1 Background

Financial sector of Bangladesh comprises with commercial banks, non-bank financial
institutions, insurance companies etc. However, the banks play the key role in the financial
system of Bangladesh. After liberation of Bangladesh in December 1971, all the financial
institutions including the commercial banks carried out their operations in order to achieve
the objectives of the government. This situation continued up to 1982. At that period, some
regulations were formulated and some directions were made to the banks with a view to
fulfill the economic objectives of the government rather than to fulfill the commercial interest
of the banks. Expansion of bank branches was also directed to increase the network of the
banking system. As a result, bank branches increased commendably which consequently
reduced the population per branch.
Based on the socio-economic consideration, the government formulated the credit expansion
policy and banks were directed to sanction credits to public sector enterprises and priority
sectors. Banks were bound to provide funds to the priority sectors with low interest rates.
Major portion of these loans became overdue and the profitability of the nationalized
commercial banks (NCBs) was declined.
In 1983, the Bangladesh Government initiated "ownership reform" program and allowed
private commercial banks (PCBs) to start their business in the industry and to enhance the
efficiency of the individual banks. At the same time, government decided to denationalize
two NCBs. This initiative was not fully successful due to two major obstacles, namely the
undue influence in the credit sanctioning process, and the absence of requirement to report
loan classification and provisioning.
In the backdrop of the prevailing poor performance and weak capacity of the banks, the
government was sincerely concerned to identify the major problems in the financial system.
Later on, a number of reform measures were initiated broadly under the Financial Sector
Reform Program (FSRP) and subsequently under Banking Reform Committee (BRC) and
Commercial Bank Restructuring Project (CBRP).
1.2 Problem Definition

The performance of banks is important to the individual consumers of bank deposit and loan
services, stockholders, employees, government regulators, management and to the entire
economy. Broadly speaking, bank performance is important to individual consumers of bank
deposit and loan services as well as to the performance of the entire economy.
The foremost question now is whether the reform measures taken were successful or not. It is
a matter of argument regarding how far these reforms have been effective towards both the
development of Bangladesh's financial sector and the improvement in the banks'
performance, and what measures still need to be undertaken to eliminate the present
impediments in the sector.
The study aims to examine the progress in the financial development in the country, and to
compare and analyze the progress under the CAMEL framework, which considers "Capital
Adequacy, Asset Quality, Management Soundness, Earning performance and Liquidity".
1.3 Objectives of the Study

The broad objective of the study is to examine the reforms that took place in Bangladesh and
to explore the financial implications of the reforms. Followings are the specific objectives of
the study:
 To review the banking sector reform programs;  To compare the financial performance of the banking system in Bangladesh before and after implementation of the banking sector reforms;  To identify different problem areas of the banking sector of Bangladesh, which still needed careful restructuring for better performance; and  To suggest some policy measures for strengthening the restructuring mechanism.
1.4 Scope and Limitations

This particular subject is extremely extensive in nature. To evaluate the effect of reform
measures on the whole banking sector it is required to study the banking system as a whole.
This report tried to concentrate only on the financial performance issues while evaluation of
the reform measures also requires some other considerations. This particular study is
extremely extensive in nature. Hard effort was given to make the study worthwhile and
meaningful; even then, there exists some limitations.
Lack of appropriate measurement yardstick and complexity of interlinks of the reform
measures among different parts of the economy and information availability constitutes one
of the major limitations of this report. In addition, the financial information was collected
from secondary sources and the accuracy could not be verified which may cause deviation
from the reality if this information is inaccurate.
1.5 Research Methodology

In Bangladesh, the whole banking industry has been divided into four groups, namely "State-
owned Commercial Banks (SCBs), state-owned Development Financial Institutions (DFIs),
domestic Private Commercial Banks (PCBs), and Foreign Commercial Banks (FCBs)".
The report is based on a critical review of both primary and secondary data. Primary data are
used in very limited cases and those are obtained through discussion with the relevant
officials, who involve with reforms programs. The main sources of data used in this study are
secondary data collected from various publications and annual reports of Bangladesh Bank,
annual reports of different commercial banks and statements submitted to Bangladesh Bank.
However, the secondary data are carefully scanned prior to using them in the report. In this
regard, the secondary data collected from different sources are compared with those of
departmental database to complement and enrich the secondary published data in order to
arrive at a logical conclusion.
The data used in this study are from both pre-reform stage and post-reform stage. In this
study, the financial deepening is determined by the monetary aggregates and private credit in
terms of the Gross Domestic Product. Financial indicators used are summarized in Table 1. Noted that these indicators are considered according to the CAMEL. Table 1.1: Financial Indicators to Evaluate Bank Performance
Key Indicator
Capital Adequacy Capital to Risk Weighted Assets Ratio Non-performing Loan Ratio Management soundness Expenditure-Income Ratio Return on Assets Earning performance Return on Equity Net Interest Income Liquid Assets/Deposit Ratio Excess Liquidity/Deposit Ratio
Trend analysis is done to indicate the performance. Various ratios were calculated and inter-
bank comparisons are made using time series data. Thus the financial performance of banks
during pre-reform and post-reform is compared and analyzed to reach a reasonable
conclusion about the impact of reforms. Performance and efficiency of the foreign-owned
and domestic banks are analyzed using the above mentioned indicators. Besides, while
discussing different reform measures taken, some problems of banking reforms could be
1.6 Presentation of the report

Chapter 1 discusses background of the study, objectives, scope and limitations, and
Chapter 2 reviews relevant theoretical and empirical literature on banking reforms, its impact
on financial development, and performance evaluation of banks.
Chapter 3 looks into the reform measures undertaken in order to remove the problems of the
financial/banking sector of Bangladesh. After describing the chronological different reform
phases, this chapter gives a short description of all reform areas.
Chapter 4 evaluates the impact of the reforms on the financial system of Bangladesh. The
chapter also assesses about the financial performance of the four categories of banks.
Chapter 5 concludes from the financial picture depicted in the study and provides some
policy inferences for further development of the banking system in Bangladesh.
Chapter 2
Literature Review
2.1 Theoretical Rationale of Financial Sector Reform
There are different views regarding the relationship concerning the economic growth and the
financial development. A number of studies were conducted to find the relationship. Some
authors believe that the economic growth mostly depends on finance (Shaw, 1973;
McKinnon, 1973). In contrast, some others consider that the relationship between finance and
economic growth is insignificant (Lucas, 1988). Benhabib and Spiegel (2000) argued that the
economic growth is positively linked to financial development. Later on, it is observed that a
country having a well-organized banking industry can achieve economic growth rapidly as a
consequence of the financial development (Levine, 2005). Most studies concluded that the
efficient financial activities channelize savings towards investment in the productive sector
which ultimately facilitates economic growth.
Financial sector reform has been initiated in so many countries in order to achieve the
financial development. Important issue is now whether there exists any connection between
the development and reform; and whether financial reforms in developing countries stimulate
growth. Though several academic literature and empirical studies show that financial reform
develops financial system by improving banking industry's competitiveness, mobilization of
savings, and allocation of efficiency whereby achieving economic growth (Besanko and
Thakor, 1992; Claessens and Laeven, 2004), there are limited studies those indicate financial
reforms are disruptive and increases the vulnerability of the financial system (Rajan, 1992;
Allen and Gale, 2000).
There are some empirical evidences in support to the impact of the financial reforms. The
consequence of financial reforms in some countries is reviewed by Sundararajan and
Johnston (1999). The effects of the financial reform in Sri Lanka are evaluated by Cooray
(2003). It can be concluded from their research that reform can establish the good governance
in the financial sector and help to attain economic growth. They also find that the size of the
market and the competition in the industry is also increased as the consequence of reforms.
2.2 Significance of Banking Sector

Banks are the foundation of the financial system of any country and an effectively
functioning financial system requires an efficient banking system. According to Schumpeter
(1934), the banking sector is the main source of fund for long term investment and the sector
is the foundation of economic growth.
Considering the significance of the banking system, most of the financial reforms throughout
the world focus on the reform of banking sector and try to make the sector robust, resilient
and sound for efficient intermediation of financial resources.

2.3 Defining Banking Sector Reform

Banking sector reform is an inevitable process when the existing structure of bank cannot
fulfill the desired level of economies of scale in operation. Disastrous banking system
sometimes might cost the real sector severely. These sorts of banking sector problems have
been epitomized by the analysts and donors as banking fragility, crisis, distress, failure,
collapse, insolvency and so on, which call for "banking reforms" on the part of the concerned
banking system. Sheng (1996) defines banking sector reform or restructuring of banks as "the
package of macro-economic, micro-economic, institutional and regulatory measures taken to
restore fragile banking systems to financial solvency and discipline".
Some authors consider that strengthening regulatory and supervisory framework is the
essential part of reform process. This view is supported by Caprio and Klingebiel (1997).
They argued that without having an efficient and effective set of prudential regulations from
the governing authority, the financial markets and the institutions are vulnerable and face
trouble to survive during the time of financial catastrophes. In addition, according to S.
Golubović and N. Golubović (2005), the foundation of a successful reform is to enact and
enforcement of appropriate laws and regulations.
2.4 Impact of Banking Sector Reforms: Empirical Evidences

Literatures analyze several aspects of banking sector reforms and show its consequences in
different countries. Khan and Aftab (1994) reviewed the effect of denationalization and
privatization aspects of financial reforms in Pakistan. They conclude that denationalization of
banks improved performance of these banks in terms of growth of assets, recovery of loans
and ratio of bad loans.
Impact of banking sector reforms to the fiscal and monetary stability of many transitional
economies was assessed by Feldman and Wagnar (2002) and they observed that the success
of reforms significantly contributes to the fiscal and monetary stability.
Relationship between reform and bank efficiency was also examined by Fu and Heffernan
(2008). They studied the performance of Chinese banking sector, and reviewed the reforms
and their influences on the ROE, ROA and NIM. They found a significant relationship
between profitability and reform.
Brownbridge and Gockel (n.d.) examined necessity of banking sector reforms in Ghana in the
1980s and evaluated its impact. They concluded that while the reforms have brought about
improvements in the banking system, banks are now more prudently managed and
2.5 Theoretical Structure of Performance Evaluation of Banks

An economy belonging to either developed or developing zones of the globe is significantly
influenced by how well its banking industry performs. In fact, bank performance concerns
almost all in and outside the hank. Consequently, there arises a crucial need for an evaluation
of performance, and this analysis and measurement of performance requires a sound
conceptual framework.
Similar to the previous literatures, different opinions are stated by different authors for
evaluating banking system performance. Some authors argued to assess banks' performance
using their income and expenses while some others opine to review the profitability ratios of
For evaluation of overall banking sector performance, competition in the sector is assumed
vital since it is related to the improvement in the competency level (Claessens and Laeven,
2.6 Financial Reforms in South Asia

Like most developing countries, South Asian countries also initiated financial sector reforms
process in around 1980's. Most of these reforms relied on reforms broadly on policy,
institutional and legal issues of the financial system. Reforms resulted in the regulatory
framework strengthening of the central banks, establishing discipline and legal support within
the financial sector, and improving capacity of the financial institutions (Adhikary et al.,
2.6.1 India

During the Gulf crisis, India faced huge problems in the balance of payment in 1991. This
crisis persuaded the initiation of structural measures in the financial system. Later on, India
formed the following three committees to identify the underlying weaknesses in the system
and to suggest the remedial measures:
 Financial System Committee in 1991;  Balance of Payments Committee in 1992; and  Banking Sector Reforms Committee in 1998.
The reform-measures in India have been originated based on recommendations put up in
these three reports. Reddy (2005) evaluate the impact of reforms and conclude that there is a
significant relationship between these reforms and the adequacy of banks' capital and the
quality of banks' assets. He shows a positive relation between reform and financial sector
stability. He finds that the non-performing assets ratio has been reduced to almost half after
1998. Profitability of banks was improved a lot.
2.6.2 Pakistan
The banking sector reform programs in Pakistan were instigated in 1988 which were
completed in three different phases during 1988 –1996, 1997-2001, and 2002-2004.
As a result of successful attainment of reforms, financial discipline and stability have been
established in Pakistan. The country has also been able to achieve economic growth (Husain,
2005). Reforms have not only develop the macro-financial system, but also resulted in the
improvement in the performance of the individual banks. Burki and Niazi (2006) investigated
the outcome of financial reform in Pakistan. They find that efficiency was declined before
1996 because the banks were adjusting to liberalization, enhanced competition. However,
they find improvement in efficiency after the completion of reform process.

2.6.3 Sri Lanka

During the late 1970s, Sri Lanka initiated its financial reform program with the introduction
of open economic policies. Initial reforms during 1977 to 1988 focused mainly on the
establishment of sound financial infrastructure. Afterward, the second phase of reform
program started in 1989 aimed at stabilizing and further liberalizing the economy in order to
support the non-public enterprises (Dunham and Kelegama, 1996). The third phase of reform
initiated in 1994 to rationalize the economic reform process with public scrutiny.
Seelanatha and Wickremasinghe (2009) summarized the upshots arose out of the reform
measures on the following aspects:
 Banking sector contributes more in the GDP,  Institutional structure of deposit-taking institutions has been developed,  Scope of banking industry has been increased,  Banking density has significantly been improved, and  Banking industry has become more competitive.
2.6.4 Nepal
Nepalese government carried out "Commercial Banking Problem Analysis and Strategy
Study" in 1990 to find out the major problems prevailing in the banking industry. The study
was completed with recommending some reform measures. However, there were no such
organized and systematic reforms initiated by the government. Later on, the government had
undertaken "Financial Sector Strategy Statement (FSSS)" in 2000 to identify the remedial
measures and to overcome the problems.
The outcome of the reform measures undertaken in Nepal was not satisfactory. However, as
the consequence of the reform programs, strong regulatory framework facilitated a sound
financial structure and orderly financial markets, and institutional structure of banking
industry has been improved.

Chapter 3
Banking Sector Reforms in Bangladesh

3.1 Instigation of Reforms

Having completed the literature review of banking sector reforms and bank performance
evaluation, we will now look at the reform measures undertaken aiming to eliminate the
problems of the financial/banking sector of Bangladesh. During the first decade of
Bangladesh after independence, financial system has been suffering from deep crises; loan
recovery was extremely disastrous, enterprises were experiencing mismanagement, financial
market and institutions were inefficient to reach the commercial goal. In order to identify the
major problems in the financial system and to suggest remedial measures, Government
formed the "National Commission on Money, Banking and Credit (NCMBC)" in 1986.
After carrying out a thorough study, the NCMBC came out with some suggestions to the
government. These recommendations were generally based on the capital adequacy
requirement of banks, problems regarding to overdue loans, strengthening of infrastructure
both for legal and institutional capacity etc.
Subsequently, a World Bank Mission conducted an comprehensive study of the financial
sector and suggested reforms relating to
 fixation of interest rates on deposits and advances;  classification of overdue loans;  restructuring of capital of NCBs and PCBs; and  market orientation of banking transactions. (Task Force Report, 1991) Bangladesh Bank combined the observations and suggestions from both the NCMBC and WB, and undertook some initiatives aligned with the suggestions. Some of these initiatives are:  decontrol of interest rates for both the deposit and lending;  improvement of capital adequacy of NCBs and PCBs;  exercising strict central bank supervisory roles;  improving the operational structure of commercial banks;  providing support by endorsing legal framework;  computerization of banks.
All these reform measures undertaken by Bangladesh Bank aimed to achieve operational
efficiency of the financial institutions and consequently to attain financial development in the
long run.
3.2 Financial Sector Reform Program
In 1992, Financial Sector Reform Program (FSRP) was also instituted to assist in
implementing the above measures. The broad objective of FSRP was to enhance
competitiveness in the banking industry, whereas the Specific objective was to make NCBs
commercially viable for subsequent privatization and help PCBs to increase their market
share in total commercial banking.
The Financial Sector Reform Program (FSRP) was launched in 1990. The World Bank and USAID financed the program and the International Monetary Fund provided technical assistance. FSRP was instituted considering to make NCBs commercially viable for privatization and to help PCBs to increase their market share. FSRP focused to improve the operations of NCBs through introducing financial technologies, adopting international best-practices, setting up IT based banking operation etc. During the tenure of the program, the FSRP consultants provided extensive training to a large number of bank officials on some tools and techniques. These tools covered how:  To analyze the risk associated with lending,  To introduce ledger card while sanctioning new loans,  To report any loan of large monetary amount,  To evaluate individual official's performance,  To supervise and inspect the banks effectively, and  To use the MIS effectively and efficiently.
3.3 BRC/CBRP Restructuring Measures

Just before the expiry of FSRP term, the government formed the "Banking Reform
Committee (BRC)". Subsequently, in May 1997, government undertook another project,
namely "Commercial Bank Restructuring Project (CBRP)". CBRP was also funded by the
WB. This project was undertaken to identify urgent course of actions needed for continuing
the pace and progress so far done. World Bank also submitted some recommendations in line
with the activities of BRC.
The WB mentioned "effective legal system, good management, and effective central bank" as
three pillars of banking and they proposed to rebuild these pillars first. The WB urged to go
for privatization only after the successful completion of financial restructuring of the NCBs.
The WB emphasized that the need for establishing strong financial infrastructure is much
important than to privatize banks.
The WB identified less attractive pay structure of NCB officials, excessive influence of trade
unions, absence of autonomy and accountability, poor internal governance and management,
over-staffing and over-branching, and weak legal infrastructure. Going with these major
obstacles, the banks cannot perform their most important function which is to ensure safety of
their deposits. Based on these observations, the WB suggested some programs mainly
focusing on to improve institutional capacity, restructure NCBs, ensuring transparency,
formulating legal procedure related to realize the outstanding loans, compliance with
international best practices etc.
Based on the recommendation of the WB, Bangladesh Bank undertook some initiatives.
Subsequently, the WB again suggested a set of urgent and short to medium term measures.
They drew attention mostly to the reform of Bangladesh Bank and urged for reestablishing
credit discipline, restructuring of NCBs and PCBs, and overall governance quality of the
banking system.
The BRC submitted detailed reports along with recommendations on various issues related to
legal framework. The BRC realized that the financial discipline is a must in order to attain the
financial stability. As the central bank of the country, Bangladesh Bank should have been
empowered to play the key role in supervision and inspection. In order for doing that, the
Bangladesh Bank should enjoy the full autonomy in all aspects. Moreover, the Board of
Directors for the NCBs should also function without restraint. Lacking full autonomy, the
Board may face interference from the government and may not perform effectively to achieve
their own commercial objectives. Relevant Acts and laws should be reviewed and amended
accordingly to ensure the legal enforcement.
Most of the CBRP's recommendations are similar to the BRC's recommendations. The
recommendations of the BRC/CBRP are broadly focused on identification of existing
problems and are able to put out recommendations for remedial measures.
3.4 Brief description of the Reforms
Having discussed the different reform measures undertaken in different phases in the banking
sector of Bangladesh, now we give a brief description of all reform areas in particular. The
basic objective of each of the reforms was the similar. However, each of the reform measures
differ from one another in terms of individual or specific objectives. Some reform measures
aimed to upgrade the policy guidelines, some to improve the institutional capacity, and some
to enhance legal enforcement in the banking system. On the basis of the above argument, the
reform measures can be classified into the following three groups:
 Policy Reforms  Institutional Reforms  Legal Reforms
3.4.1 Policy Reforms

A number of guidelines were promulgated by the Bangladesh Bank to enhance the policy
framework. These are as follows:
o Risk-Based Capital adequacy o Loan Classification and Provisioning o Credit Risk Grading o Interest Rate Deregulation (Loan Pricing) o Performance Planning System (PPS)
Risk-Based Capital Adequacy

Capital is the cushion of a bank to cover credit risks, and therefore, capital adequacy is a
generally used tool to assess the financial health of a bank. Capital adequacy is the most
important indicator of a bank in the current banking system. Minimum capital adequacy
guidelines based on Capital-to Liabilities approach was incorporated in the Banking
Companies Act, 1991 and in the Banking Companies (amendment) Act, 1995.
Following the recommendation of the Bank for International Settlement (BIS), Bangladesh
Bank also started Risk Weighted Capital Adequacy system in January 1996. Banks were
instructed to submit their capital ratios together with summary information about components
on a risk assessed basis by June, 1996. The risk based capital system primarily deals with
credit risk and explores the possible ways to handle other risks also. It is, in fact, a significant
prudential regulatory instrument in assessing bank's capital position and disciplining their
market behavior.
Loan Classification and Provisioning
In order to ensure early recognition of Non-Performing Loans, Bangladesh Bank has
formulated the Loan Classification and Provisioning policy. All the commercial banks have
to set up of required provisions for their loans. According to the policy, a certain portion of
the loans and advances sanctioned by all the banks have to be kept under the newly set up
provisions. "Offshore Banking Unit (OBU)" of the banks has also to follow this new policy.
This attempt made the OBU transactions more transparent.
Credit Risk Grading
In order to manage the risk effectively, Bangladesh Bank has introduced the Credit Risk
Grading System (CRGS). As per the policy, the banks have to grade their loans into 8(eight)
categories. These grades are Superior, Good, Acceptable, Marginal/Watch list, Special
Mention Account, Substandard, Doubtful and Loss.
Interest Rate Deregulation
According to the recommendation of NCMBC, Bangladesh Bank has taken the policy for
deregulation of interest rate both on deposit and lending. The policy empowered the banks to
set different interest rates depending on the risks involved with individual borrowers. The
maximum allowable limit that a bank can differentiate is 3 percent. Based on the assessment
of the credit risk, the banks are allowed to change interest rate freely for various customers
and for various sectors.
Performance Planning System (PPS)

Performance Planning System (PPS) comprises of setting a concrete goal on the part of a
banker based on his priorities and followed by a well-defined action plan to achieve that goal.
Through this goal statement and action plan, the concerned banker can keep himself up to
date in terms of his performance. PPS also facilitates the immediate senior authority to
monitor the progress of his subordinates including those concerning loans. PPS has been
introduced in all NCBs for recovery and other functions.
All the branches of NCBs (excepting their overseas branches) have been covered by PPS by
1995. It was expected that the employee appraisal system would be developed in the light of
the PPS. The controlling authority can easily judge the initiative and efforts made by the
employees. Objective appraisal system is consistent with the psychological principle that
people work better when they have definite goals.
3.4.2 Institutional Reforms

To improve the institutional capacity of the financial sector, following reform measures were
o Off-site Supervision (CAMEL Rating) o Credit Information Bureau (CIB) o Large Loan Reporting System (LLRS)
Off-site Supervision (CAMEL Rating)

Bangladesh Bank has introduced a number of reporting forms and returns to be submitted by
the commercial banks regularly. On the basis of those returns, Bangladesh Bank prepares a
composite rating on yearly basis for each bank. This rating is known as CAMEL rating.
Based on the CAMEL rating, Bangladesh Bank gives Early Warning Signal (EWS) to a
particular bank which is facing problems. CAMEL comprises of the following five
performance measures and these components are explained below:
Capital Adequacy : Banks have to maintain the capital equal to 8% of its "Risk weighted Assets" out of which minimum 4% of their core capital. Assets Quality : Amount & nature of non-performing assets, Management efficiency organizational, leadership ability and integrity. Earning performance : Sound control of expenses, efficient fund management, budgeting discipline etc. Liquidity : Asset/liquidity management procedure/policies, reliability of funding source, etc.
Credit Information Bureau (CIB)

Before considering any loan proposal, a bank has to know the status of the loan applicant in
regard to his/her liabilities outstanding with any other banks/branches. Bangladesh Bank has
established CIB in August 1992. CIB report is considered as one of the basic information for
consideration of a loan. The aim of the report is to avoid duplication of credit facilities, avoid
credit facilities to defaulters and justify the status of the borrowers. It was made mandatory
for all banks to collect data from CIB before sanctioning any loan proposal above Taka 5.00
million. Apart from this, to maintain record of the borrowers' performance, NCBs have to
submit report to Bangladesh Bank regularly on their progress in collection of the larger
overdue loans and on larger loans sanctioned since January 1, 1990.
Large Loan Reporting System (LLRS)

Large Loan Reporting System was introduced by the Bangladesh Bank to keep a control and
supervision on a regular basis in the process of sanctioning loans having bigger amount. By
July 1995, 78 percent of new large loans of NCBs have been reported by LLRS. Now, almost
all large loans are reported by LLRS. In the mean time, Bangladesh bank has formed a
separate section in the Department of Banking Operation and. Development (DBOD). The
commercial banks have to seek permission from the section prior to sanction any large loan.
This section closely monitors and reviews the issues of larger loans of the banks. The
responsibility of the section is to advise the concerned bank to take immediate appropriate
actions if any loan is assumed undue risky.

3.4.3 Legal Reforms

Weak legal framework was one of the major drawbacks of the financial system in
Bangladesh. Enforcement of legal action was even worse. In order to strengthen legal
infrastructure of the financial system, following Acts were enacted:
o The Banking Companies Act, 1991 o Artha Rin Adalat Act, 1990 o Bankruptcy Act, 1997
The Banking Companies Act, 1991

The Banking Companies Act, 1991 was enacted in February 1991 in order to make the role of
Bangladesh Bank authoritarian in dealing with licensing, monitoring, regulating and
supervising the banking sectors. The Act was subsequently amended twice in 1993 and 1995
which empowers Bangladesh Bank further.
The Act deals mainly with the operations and permitted activities of the banking companies.
Bangladesh Bank exercises the Act in order to reestablish the discipline in the sanctioning
and rescheduling of loans and advances. Direct or indirect relationship between the borrower
and bank authority which is known as the "Connected lending" was identified as the most
critical problem in the banking sector. In order to prevent this sort of lending, some
restrictions were imposed on loans and advances as mentioned in the Section 27' of the Act.
Rescheduling of defaulted loans is now critically monitored by Bangladesh Bank. It is not
allowed to reschedule the outstanding loans more than twice.
Artha Rin Adalat Act, 1990

In order to recover the defaulted loans, Artha Rin Adalat Act, 1990 was enacted in 1990 in
order to recover the defaulted loans. Prior to setting up of Artha Rin Adalat, there was no
special law for recovery of loans. Banks had to file cases in sub-judge commercial courts to
sue any defaulter. However, the disposal of cases was procrastinated due to long legal
procedures and over burdened judges.
Recognizing the problem, the government enacted the Act. A series of amendments were
made to the Act in 1990, 1992, 1994 and 1997 to incorporate the effective rules
accommodated with the changed situation. Even after so many amendments, the Act still
suffers from some drawbacks.
Bankruptcy Act, 1997
The Bankruptcy Act, 1997 has been enacted in March 1997. According to the Bankruptcy
Act, all the District Judges are deemed as bankruptcy courts and they are empowered to
authorize Additional District Judge to deal with and dispose of bankruptcy issues. Apart from
these, two exclusive Bankruptcy Courts in Dhaka and Chittagong were set up. All these
courts were institutes in addition to the financial loan courts.
The Act has been enacted with a view to judge a debtor as bankrupt, make smooth realization of a bankrupt's assets, discharge the debtor after distribution of his assets, and take effective measures against defaulting borrowers. Chapter 4
Impacts of Reforms on Banking Sector in Bangladesh
This chapter presents the consequences of banking sector reforms especially on the financial sector development and the performance of different types of commercial banks operating in Bangladesh. While evaluating the performances of banks, this chapter makes a comparison between the performance indicators of local banks with that of foreign banks. 4.1 Impact of Reforms to Financial Development

One of the major objectives of banking sector reforms is to develop the financial system. It
also aims to increase the competition among the banks in addition to the improvement in the
profitability. Now, we will examine the overall financial development in the following areas:
 Financial Deepening  Competitiveness within the banking industry  Profitability of the banking industry 4.1.1 Financial Deepening

Financial deepening means the overall growth of the system. Depth of financial system is
conventionally determined by the monetary aggregates in terms of a country's Gross
Domestic Product. Growth of Monetary aggregates and GDP have been on an upward trend
for the last decade. Broad money growth in FY 2010-11 was 21.3 percent which is slightly
lower than the growth occurred in FY 2009-10 (22.4 percent). Net domestic asset has been
increasing since FY 1993-94 due to considerable increase of the total domestic credit
(including private credit). Income velocity of money is declining since FY 1993-94 which
reveals the deepening in the financial system. Table 4.1 shows some selective indicators of
Bangladesh financial sector.
We now evaluate the impact of reforms to financial development in terms of
o Size and depth of the banking sector o Mobilization of savings o Stimulation for long term savings o Improvement in the cash flows towards the banking system
Size of banking sector

The overall size and depth of the banking sector is conventionally measured by the following
two ratios:
o M2/GDP Ratio, o Private Credit/GDP Ratio. Table 4.2 exposes the M2/GDP and Private Credit/GDP ratios since FY 1993-94. At that period, the M2/GDP ratio was 26.9% which has been increased every year and stands now at 55.9%. Private credit to GDP ratio has also been increased since FY 1993-94. The private credit to GDP ratio in FY 2010-11 was 43.3% which was almost 3-fold of that in FY 1993-94. The rising trends of these two ratios reveal that the size of Bangladesh's banking sector is increasing. Table 4.1: Selective Indicators of Bangladesh Financial Sector
(BDT in billions) Financial
Source: Statistics Department, Bangladesh Bank
Mobilizing savings

Reform measures are able to channelize savings from the individuals to the banking system.
M1/M2 ratio is the traditional tool to measure the ability of a country's financial sector to be
succeeded in mobilizing savings. Table 4.2 shows that the ratio has been decreasing during
the period from FY 1993-94 to FY 2010-11 with a very little fluctuation which means that the
term deposits have been increasing throughout the period as a percentage of broad money M2.
Table 4.2: Key Ratios of Financial Indicators
Velocity of

Stimulating long term savings

M3/GDP ratio suggests the banks' ability to stimulate long term savings. Table 4.2 shows a
rising trend in the ratio which means the rising of long term savings. Bangladesh Bank started
to compute M3 from FY1998-99 and at that FY, the ratio was 35% which increased to 65% in
FY 2010-11. M2/GDP ratio also shows the similar trend. This ratio started to increase from
27% in 1993-94 to 39% in 2003-04 and now is 56% FY 2010-11.
Improvement in the cash flows towards the banking system

M2/M3 ratio is generally used as a proxy to determine the direction of cash flows to/from the
banking sector. In Bangladesh, M2 includes assets in banking sector only; whereas M3
includes assets in banking sector as well as in National Savings Directorate (NSD) and Non-
Bank Depository Corporations (NBDC). An increasing M2/M3 ratio indicates that the assets
in banking sector increases in comparison to assets in NSD and NBDC which ultimately
reveals that cash flows are increasing towards the banking system. Bangladesh Bank started
to compute M3 since the period 1998-99. Initially, the ratio declined for the 3 years up to FY
2001-02 and after that period, it started to increase till date. This increasing ratio validates that the cash flows are increasing towards the banking system. 4.1.2 Competitiveness of the Banking Industry

We know from the literature review that the competition in the banking sector is assumed
vital since it impels the participants to innovate attractive financial products and services. A
country can be able to achieve higher economic growth if the banking system of that country
is more competitive. We analyze the competition in the banking industry for the previous six
years by the following two ways:
 the concentration ratio within the total assets  Herfindahl-Hirschman Index (HHI)
Concentration Ratio
We analyzed the concentration ratio within the total deposits for top bank, top 5 banks and
top 10 banks for the last 6 years. Moderate competition is found when we consider top 5
banks' concentration ratio, in contrast to oligopoly competition while we consider top 10
banks. However, Table 4.3 shows that all the concentration ratios are on decreasing trend. It
reveals that the banks having higher market share are losing their shares which are grabbed
by the other banks. This exposes an increasing competition among the banks in the industry.
Table 4.3: Concentration Ratio within the Total Deposit
Top 5 Banks
Top 10 Banks
Herfindahl-Hirschman Index (HHI)

The Herfindahl-Hirschman Index (HHI) is a generally used indicator which determines the
concentration prevailing in any market. We analyze the HHI for market share of all the
individual banks for the last 6 years. Market share of banks is determined by both the
liabilities (deposits from customers) and assets (loans and advances to the customers).
Table 4.4: Herfindahl-Hirschman Index (HHI)
Loans and Advances
Table 4.4 exposes that the banking industry is being more competitive from 2005 to 2011 both for the deposits and loans and advances. For both the cases, HHI has been decreased which indicates an increased competitive environment within the banking industry. 4.1.3 Profitability of the Banking Industry

Profitability is one of the indicators to measure the improvement in the banking industry. We
analyze two profitability ratios, namely "Return on Assets (ROA)" and "Return on Equity
(ROE)", and the "Net Interest Income (NII)" for the banking sector since 2000. All these
variables have increased considerably during the period.
Table 4.5: Profitability of the Aggregate Banking Industry
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
ROE 10.91 16.94 11.6
70.9 81.46 121.9 Source: Statistics Department, Bangladesh Bank
4.2 Performance Evaluation of Banks

We now evaluate the performance of banks on the basis of CAMEL framework. This
evaluation is done for the four categories of banks, namely "state-owned commercial banks
(SCBs), government-owned development financial institutions (DFIs), domestic private
commercial banks (PCBs), and foreign commercial banks (FCBs)".
4.2.1 Capital Adequacy

Before 2004, all the commercial banks in Bangladesh had to maintain a minimum Capital
which is not less than 8 percent of their Risk weighted Assets (RWA). Out of this, they had to
maintain a minimum of 4.5 percent in core capital. Later on, the ratio was increased and the
banks had to maintain the higher amount of these two: 9% of their RWA or BDT 200.00
At the end of December in 2010, the PCBs and FCBs were able to maintain the required
Capital Adequacy Ratio and the ratio was 10.1 percent for PCBs and 15.6 percent for FCBs.
The SCBs marginally failed to maintain the required level of adequacy as the ratio was 8.9
percent and the adequacy ratio for the DFIs was negative. Overall CAR of the industry in
2010 was 9.3 percent which was lower than that of the previous 3 years. Before 2010, the
FCBs were maintaining a capital adequacy ratio more than 20 percent for the last 8 years.
PCBs and FCBs could maintain the required level of capital to risk weighted assets
throughout the period under consideration. It is evident that the ratio maintained by the FCBs
is much higher than the required level. SCBs could maintain the required level of adequacy
for 2009 and 2010, and DFIs could maintain the level only in 2004. National aggregate
position of capital to risk weighted assets fulfills the required level in the recent years only
due to the higher capital maintained by the FCBs.
Table 4.6 shows the "Capital to Risk weighted Assets Ratio" maintained by the four different
types of banks.
4.2.2 Asset Quality

The Non-Performing Loans (NPLs) Ratio is the most important indicator to identify the
problem inherent in asset quality. At the end of 2010, NPLs of the SCBs, DFIs, PCBs and
FCBs are 15.7, 3.2, 3.0 and 24.2 percent respectively of their total assets.
The overall aggregate NPLs ratio is still very high, the scenario is improving to a large extent
after 1999 when the ratio reached its peak (41.1 percent). FCBs could maintain a significant
low ratio of NPLs to total assets. SCBs and DFIs experienced much higher NPLs to total
assets ratio before 2002. Later on, they started to strengthen the mechanism of loan recovery
and it is clear from the Table 4.7 that the situation has been improved a lot.

4.2.3 Management Efficiency

It is difficult to quantify the efficiency of bank management; however, expenditure to income
ratio, and income and expenditure to manpower ratio may be used to determine the
management efficiency.
Table 4.8 shows that at the end of 2010, expenditure-income (EI) ratio of the banking
industry was 70.9 percent. DFIs possessed the EI ratio of 87.8 percent and it was higher than
the other three groups of banks. The EI ratio of SCBs, PCBs and FCBs are 80.7, 67.6 and
64.7 percent respectively.
It transpires from the Table 4.8 that the EI ratio is significantly higher in case of the DFIs. In
1997, the ratio was 150 percent. Surprisingly the ratio was increased more to 180.4 percent in
the next year. The EI ratio for the DFIs is still very high in comparison with the other types
of banks. The DFIs had to made loan loss provisions; as a result, their financial statement
exhibits a high EI ratio. Due to operating loss incurred by 2 DFIs, income of the DFIs again
declined and the EI ratio again increased to 107.7 percent in 2007 and 112.1 percent in 2009.
Most of the years, the SCBs could maintain the EI ratio below 100 percent. It is seen from
the Table 4.8 that the EI ratio for the SCBs never went below that ratio maintained by PCBs
and FCBs.
Table 4.6: Capital to Risk Weighted Assets Ratio by Types of Banks
1997 1998
1999 2000 2001 2002 2003 2004
2006 2007 2008
2009 2010
-7.55 -6.70 -5.57 -5.38 9.21 11.01 10.96 9.91 9.76 10.51 10.37 9.89 10.61 11.42 12.15 10.16 FCBs 16.72 17.16 15.81 18.47 16.82 21.58 22.92 24.29 26.02 22.70 22.72 24.09 28.11 15.65 10.11 11.66
Source: Statistics Department, Bangladesh Bank Table 4.7: Non-Performing Loans to Total Loans Ratio by Types of Banks
2006 2007 2008
2009 2010
SCBs 36.61 40.49 45.60 38.68 37.02 33.77 29.04 25.32 21.44 22.97 29.91 25.46 21.43 15.72 DFIs 65.72 66.71 65.09 62.64 61.87 56.22 47.46 42.91 34.94 33.72 28.65 25.51 25.97 24.21 PCBs 31.48 32.75 27.18 22.07 17.04 16.76 12.40 Total 37.52 40.73 41.19 34.92 31.54 28.12 22.17 17.64 13.68 13.24 13.28 10.82
Source: Statistics Department, Bangladesh Bank Table 4.8: Expenditure-Income Ratio by Types of Banks
102.3 101.9 100.0 100.0 150.0 180.4 145.2 175.3 101.1 104.0 103.9 103.5 107.7 103.7 112.1 FCBs 59.40 60.10 67.40 77.73 75.78 78.32 80.31 76.34 70.82 71.19 72.91 75.83 59.01 Total 95.31 95.43 96.62 99.93 91.21 93.36 93.93 90.96 92.11 91.44 90.42 87.96 72.61 70.94
Source: Statistics Department, Bangladesh Bank

4.2.4 Earning Performances

The generally used indicator to determine the earning is "Return on Assets (ROA)". The other
two ratios namely the "Return on Equity (ROE)" and the "Net Interest Margin (NIM)" are
also used to measure the profitability.
Tables 4.9 and 4.10 expose ROA and ROE attained by different types of banks. It transpires
from those tables that these ratios vary considerably for different categories of banks. The
FCBs' ROA was 4.82 percent in 1997. In the last year, it was 2.9 percent. Though the ratio
declined after 1997, the FCBs could attain a strong ROA throughout the period under
consideration. ROA of PCBs has also on increasing trend for the last 7 years. The ROA of the
SCBs and the DFIs are very poor. These two types of banks even failed to earn a positive
ROA in some years.
Bangladesh Krishi Bank incurred huge loss in 2009 which leads the DFIs' return on equity to
negative 171.7 percent in that year. ROE of the DFIs were negative in most of the years.
PCBs and FCBs are able to achieve considerable ROE in the last 14 years whereas the SCBs
are improving to attain high ROE after 2007.
Table 4.11 shows that the overall net interest income (NII) has been consistently on the
positive trend. NII of PCBs and FCBs are on upward trend which means that they are
enjoying high spread between interest rates of lending and deposit collecting. SCBs are able
to increase their NII after 2004 by reducing their cost of fund and during 2010 it was Taka
19.8 billion. NII of DFIs is also on positive trend for the last couple of years.

4.2.5 Liquidity

Table 4.12 and 4.13 reveal that all the four categories of banks are maintaining excess
liquidity. SCBs and FCBs have comparatively higher excess liquidity ratio over the other two
groups throughout the period from 1997. Excess liquidity maintained by the banks reveals
that the banks have un-utilized fund which can be invested in profitable sectors.
Table 4.9: Return on Assets (ROA) by Types of Banks
2001 2002 2003 2004
2005 2006 2007 2008
0.18 -0.15 -0.12 DFIs -2.12 -2.92 0.06 -0.27 -0.12 -0.27 -0.39 -0.63 Source: Statistics Department, Bangladesh Bank Table 4.10: Return on Equity (ROE) by Types of Banks
2001 2002
2005 2006 2007 2008
DFIs -29.13 -36.34 -68.03 12.30 5.86 -2.13 -2.06 -2.09 -3.42 -6.95 Source: Statistics Department, Bangladesh Bank Table 4.11: Net Interest Income by Type of Banks
(Taka in Billions) 1998 1999
2000 2001 2002 2003 2004 2005 2006 2007 2008
54.8 70.9
Source: Statistics Department, Bangladesh Bank Table 4.12: Liquid Assets/Deposit by Types of Banks
1997 1998
1999 2000 2001 2002 2003 2004
2006 2007 2008
2009 2010
SCBs 22.77 24.42 25.23 26.56 25.79 27.35 24.49 22.82 20.06 20.17 24.99 32.93 25.13 27.22 DFIs 16.92 16.63 15.75 16.21 15.32 13.76 12.02 11.22 11.28 11.99 14.28 13.73 9.68 PCBs 24.26 24.89 25.97 24.83 24.25 26.37 24.42 23.13 21.01 21.44 22.22 20.77 18.28 21.54 FCBs 31.24 39.85 51.31 34.77 34.11 41.68 37.83 37.84 41.56 34.45 29.26 31.36 31.85 32.18 Total 23.38 25.29 27.05 26.19 25.37 27.26 24.75 23.45 21.73 21.52 23.24 24.83 20.66 23.09
Source: Statistics Department, Bangladesh Bank
Table 4.13: Excess Liquidity/Deposit by Types of Banks
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Total 4.46
Source: Statistics Department, Bangladesh Bank Chapter 5
Conclusions and Policy Inferences

5.1 Conclusion
The problems inherent in the banking sector of Bangladesh have been developing over many
years. Bangladesh Bank and the Government have promoted a number of the reform
measures with a view to bring the situation under control. The very first objective of the
reforms was to identify systematic problems and threats for overall banking system and to
identify the specific problems in individual banks. The reforms were in fact wholly successful
in fulfilling the first objective.
Following restructuring initiatives, financial system in Bangladesh has been developed
considerably and it is continuously improving. Particularly, financial sector has been
deepened further, while monetary aggregates are growing. Efficient financial products are
also being introduced as mobilization of savings tends to be improved. In addition, long term
investments are stimulated, competitiveness within the industry has been enhancing, and the
profitability scenario of the banking industry has been improved.
Prior to the banking sector reforms, the banks did not consider the fate of the outstanding
loans. A large number of non-performing loans were considered as performing assets,
because there was no appropriate criterion for loan classification and provisioning. As a
result, banks were able to achieve a high accounting profit. The loan classification and
provisioning and loan losses were not even required to report in their financial reports.
In order to comprehend the status of the defaulted loans, new loan classification and
monitoring policies were formulated. As a result, defaulted loans could be identified easily,
and hence bank could monitor the loans continuously for recovery. In addition, Bangladesh
Bank issued new reporting guidelines on the basis of International Accounting Standard
(IAS-30). Banks are now compelled to prepare the financial statements complying with IAS-
30. Therefore, classified loans, provision shortfall and loan losses are now more transparent
to the stakeholders and the bank management is more accountable.
Actual capital as percentage of required capital, maintenance of liquidity, operational
efficiency and profitability improved to some extent. As the banks had to gradually adopt the
internationally accepted loan classification policies and accounting procedures, loan
classification and provisioning shortfall was higher initially in the post-reform stage which
affected the profitability as well as the financial strength of the banks.
The results from this research show that the adoption of risk-based capital adequacy certainly
improved performance of capital adequacy of banks in the post-reform era. Management
performance in monetary terms was also increased throughout the period under consideration.
In terms of profitability the banking sector had mixed experience during the period under
consideration. Profitability of state-owned commercial banks (SCBs) had declined because of
higher provision maintenance from their income and accounting of interest income on
classified loans as interest suspense, which was earlier shown as income in the pre-reform
stage. On the other hand, the profitability of PCBs and FCBs showed an increasing trend in
the post-reform stage because of deregulation of interest rates in loan pricing and liberty to
select potential clients and projects for investment and involve in diversified businesses.
Liquidity performance of the banks indicates that there is no such improvement over the
period. All types of banks have much liquid assets excess of their requirements.
The performances of the foreign banks are significantly better in comparison to the local
banks in every aspect. FCBs could be able to maintain a "Capital to Risk Weighted Assets
Ratio (CRAR)" which is higher than that maintained by the rest three groups of banks. Non-
performing assets of FCBs are negligible comparing with their assets. Though FCBs
maintained a substantial amount of liquidity, their profitability in terms of ROA and ROE,
and NIM are higher than the local banks. If we consider the management efficiency in
monetary terms, the FCBs were capable to control their expenditure- income ratio lower than
the other three groups of local banks.
FCBs are performing much better than the local banks due to a number of reasons. Apart
from complying with the policies and guidelines issued by Bangladesh Bank, the FCBs have
also to comply with the policies and guidelines issued by their head office. They are
exploiting the international best practices in their operation. In addition, they are audited on a
regular basis by their head offices. Hence, they have more controlling systems and become
more transparent which lead them to build an excellent management and administration.
They can get support from their head office in analyzing risks including credit risks and
operational risks. They can easily track the recovery of loans as they have limited branches
and customers, and advanced Management Information System and Accounting Information
System. The FCBs have efficient human resources as well who are being trained up from the
beginning of their job on the state of the art banking technology.
In short it can be concluded that because of reform measures banks are now goal oriented,
more equipped with information and analysis, and more independent to decide strategy for
growth. In terms of making things accountable and transparent, the impact of reform is
excellent. At the same time, if recovery is ensured, then overall financial position would also
5.2 Policy Inferences
The restructuring measures taken so far are definitely not sufficient considering the gravity of
the situation. Based on the above discussion the following steps may need to be taken as
reform or restructuring measures to speed up the progress:
 The aim of any restructuring process is to attain solvency first. Though capital position of the banking system has improved slightly in the recent years, yet most of the SCBs and DFIs, and a number of PCBs are significantly undercapitalized. If injection of new capital is not possible then the banks should be allowed/motivated to raise new capital from the security market.  Non-performing loans should be focused exclusively in an efficient and productive way. Separate management within the same organization should be deployed to look after NPLs.  The problem of excess liquid asset of the banks should be handled with due attention. In order to utilize the excess liquidity, efficient fund management should be exercised by the banks.  Compliance with International Accounting Standard should be ensured in preparation of financial reports. Auditing of the particulars of financial statements should be done as per international standard for a transparent and proper disclosure of the financial strength of the banks.  Banks under Early Warning System have to prepare course of actions with individual deadlines to overcome specific problems. Bangladesh Bank has to deal with these banks properly and monitor their progress closely.  A number of measures were taken to strengthen the legal framework. However, in order to attain the benefit of improved legal framework, enforcement of legislations should be ensured. Legal procedures should be uncomplicated and disposal of case should be speedier.  Government interference, political involvement, pressure from the trade unions has to be reduced for the smooth functioning of the banks.  For developing the asset utilization ratio, portfolio of asset structure should be rearranged by removing the non-earning assets or transforming the non-earning assets into earning one.  Local commercial banks can also employ qualified and efficient employees with higher salary package and can train them according to their needs for achieving the better output.  Technological up-gradation of the banking system is needed equipped with state-of- the-art infrastructure and logistics.  One of the major causes of the non-fulfillment of the entire objectives of the reform measures is lack of proper and extensive training. Arrangement of large scale training program from both central bank and commercial bank is must to get the concrete result from the reform programs.  Lastly, the problem of Bangladesh financial system is widespread and not related to banking system only. Therefore the scope of the reform measures should also be applied to the non-bank financial institutions, for sustainable banking reform. List of References
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Exploring psychotherapeutic issues and agents in clinical practice Psychopharmacology Robert H. Howland, MD, Section Editor © 2009/Digital Juice, Inc. Clinical Implications of Chirality and Stereochemistry AbStRACt Chirality, the concept of nonsuperimposable pounds containing mirror-image enantio-mirror images, is a fundamental property of mers in equal proportions are referred to as biological systems and can be observed on

Microsoft word - §+1+kartellverbot.doc

Prof. Dr. Christian Schubel Sommersemester 2008 Europäisches Wettbewerbsrecht § 1 Das Kartellverbot – Tatbestand und Rechtsfolgen I. Sachlicher und örtlicher Anwendungsbereich das europäische Kartellrecht gilt umfassend € es gibt also keine Bereichsausnahmen, insb. unterstehen auch Banken, Versicherungen und Versorgungsunternehmen dem europäischen Kartellrecht