Bangladesh is a third world country with an under developed banking system, particularly in terms of the services and customer care provided by the government run banks. Recently the private banks are trying to imitate the banking structure of the more developed countries, but this attempt is often foiled by inexpert or politically motivated government policies executed by the central bank of Bangladesh, Bangladesh Bank. The outcome is a banking system fostering corruption and illegal monetary activities/laundering etc. by the politically powerful and criminals, while at the same time making the attainment of services or the performance of international transactions difficult for the ordinary citizens, students studying abroad or through distance learning, general customers etc..
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 insurance
business was also nationalized and became a source of potential investment
funds. Cooperative credit systems and postal savings offices handled service to
small individual and rural accounts. The new banking system succeeded in
establishing reasonably efficient procedures for managing credit and foreign
exchange. The primary function of the credit system throughout the 1970s was to
finance trade and the public sector, which together absorbed 75 percent of
total advances.[1]
The government's encouragement during the late 1970s and early 1980s of
agricultural development and private industry brought changes in lending
strategies. Managed by the Bangladesh Krishi Bank, a specialized agricultural
banking institution, lending to farmers and fishermen dramatically expanded.
The number of rural bank branches doubled between 1977 and 1985, to more than
3,330. Denationalization and private industrial growth led the Bangladesh Bank
and the World Bank to focus their lending on the emerging private manufacturing
sector. Scheduled bank advances to private agriculture, as a percentage of
sectoral GDP, rose from 2 percent in FY 1979 to 11 percent in FY 1987, while
advances to private manufacturing rose from 13 percent to 53 percent.[1]
The transformation of finance priorities has brought with it problems in
administration. No sound project-appraisal system was in place to identify
viable borrowers and projects. Lending institutions did not have adequate
autonomy to choose borrowers and projects and were often instructed by the
political authorities. In addition, the incentive system for the banks stressed
disbursements rather than recoveries, and the accounting and debt collection
systems were inadequate to deal with the problems of loan recovery. It became
more common for borrowers to default on loans than to repay them; the lending
system was simply disbursing grant assistance to private individuals who
qualified for loans more for political than for economic reasons. The rate of
recovery on agricultural loans was only 27 percent in FY 1986, and the rate on
industrial loans was even worse. As a result of this poor showing, major donors
applied pressure to induce the government and banks to take firmer action to
strengthen internal bank management and credit discipline. As a consequence,
recovery rates began to improve in 1987. The National Commission on Money,
Credit, and Banking recommended broad structural changes in Bangladesh's system
of financial intermediation early in 1987, many of which were built into a
three-year compensatory financing facility signed by Bangladesh with the IMF in
February 1987.[1]
One major exception to the management problems of Bangladeshi banks was the Grameen
Bank, begun as a government project in 1976 and established in 1983 as an
independent bank. In the late 1980s, the bank continued to provide financial
resources to the poor on reasonable terms and to generate productive
self-employment without external assistance. Its customers were landless
persons who took small loans for all types of economic activities, including
housing. About 70 percent of the borrowers were women, who were otherwise not
much represented in institutional finance. Collective rural enterprises also
could borrow from the Grameen Bank for investments in tube wells, rice and oil
mills, and power looms and for leasing land for joint cultivation. The average
loan by the Grameen Bank in the mid-1980s was around Tk2,000 (US$65), and the
maximum was just Tk18,000 (for construction of a tin-roof house). Repayment
terms were 4 percent for rural housing and 8.5 percent for normal lending
operations.[1]
The Grameen Bank extended collateral-free loans to 200,000 landless people
in its first 10 years. Most of its customers had never dealt with formal
lending institutions before. The most remarkable accomplishment was the
phenomenal recovery rate; amid the prevailing pattern of bad debts throughout
the Bangladeshi banking system, only 4 percent of Grameen Bank loans were
overdue. The bank had from the outset applied a specialized system of intensive
credit supervision that set it apart from others. Its success, though still on
a rather small scale, provided hope that it could continue to grow and that it
could be replicated or adapted to other development-related priorities. The
Grameen Bank was expanding rapidly, planning to have 500 branches throughout
the country by the late 1980s.[1]
Beginning in late 1985, the government pursued a tight monetary policy aimed
at limiting the growth of domestic private credit and government borrowing from
the banking system. The policy was largely successful in reducing the growth of
the money supply and total domestic credit. Net credit to the government
actually declined in FY 1986. The problem of credit recovery remained a threat
to monetary stability, responsible for serious resource misallocation and harsh
inequities. Although the government had begun effective measures to improve
financial discipline, the draconian contraction of credit availability
contained the risk of inadvertently discouraging new economic activity.