Banks play a pivotal role in mobilization and allocation of resources in an economy. Deposits and advances are termed as inflow and outflow, i.e. the funds of the banks. The loans and advances are deployed by the commercial banks based on the deposits after maintaining statutory requirements prescribed by Bangladesh Bank (BB) from time to time.
Hence,
the Advance Deposit Ratio (ADR) is considered as a barometer of progress of all
financial institutions. ADR is the ratio of total advances to total deposits,
where advances comprise all banking advances. Deposit comprises all demand and
time deposits excluding bank deposits and additional net borrowing.
A
high ADR shows that banks are generating more credit from their deposits and
vice-versa. The outcome of this ratio reflects the ability of the bank to make
optimal use of the available funds. ADR of commercial banks has great significance.
Primarily, it is a measure of the utilization of funds by the banking system.
This ratio is an important tool of monetary management.
The
ADR or IDR of all banks has been increased to 87 percent from the existing 85
percent for conventional banks and 92 percent from the existing 90 percent for
Shariah-based Islamic banks as per BB circular. AD Ratio is different for
Islamic Bank due to following reasons
· Valuation of Bank's Assets.
· Credit Creation and Monetary Policy.
· Financial Stability.
· The Ownership of Banks.
· Lack of Capital Market and Financial Instruments.
· Insufficient Legal Protection.
· Increased Cost of Information.
· Imitation of conventional finance.
· Profit and Loss Sharing and its problems.