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Status Indicators of Banking Sector in Bangladesh: A Comparative Study

Introduction

The banking system as it existed in pre-liberated period, suffered from a number of weaknesses and limitations. The shortcomings were duly recognized and clearly spelt out by the Credit Equity Commission (1959) and the planning Commission (1970). A few business houses controlled the whole credit program to suit their needs and as a result the whole economy was mortgaged to 20/22 families, who controlled 66 percent of total industrial assets, 70 percent of insurance funds, and 80 percent of bank assets.[1] In the post- liberation period, the Government of Bangladesh inherited a large number of financial institutions, which were abandoned by their Pakistani owners. In the financial sector of the economy, a vacuum was created by the departure of their owner entrepreneurs, leading to take over of banks by the Government. Banks in Bangladesh were nationalized through the Bangladesh Bank (Nationalization Order 26th March 1972). The order of nationalization was passed through the parliament. Six new Nationalized Commercial Banks (NCBs) were created by reorganizing 12 banks, which were privately owned. In 1983 Bangladesh Government took a decision to denationalize two nationalized commercial banks (NCBs) namely Uttara Bank (UB) and Public Bank (PB). These banks were converted into Public Limited Company in June 1983. Seven more private commercial banks started functioning out of which six were established during 1983 and another was established in May 1987. Since 1972, Banking sector have been playing a commendable role in achieving the economic growth of Bangladesh.

Statement of the Problems

Banking in general as a competitive position due to its diversified nature like the NCBs, PCBs, SCBs and FCBs. Capital market & Money market are well managed but due to natural calamity shortage of power & gas facilities & raw materials, industrial efficiency is questionable. Stuck-up advances increase due to low recovery as a result there is a high cost of working fund of the commercial banks. There is also excess fund due to lack of opportunity of investment of working fund. These affects the earnings power, profitability & productivity of the commercial banks

Justification of the Study

Bangladesh is an underdeveloped country. Since 1972, Banking sector have been playing a commendable role in achieving the economic growth of Bangladesh. A host of research studied has been conducted on the various aspects of NCBs, PCBs, SCBs, FCBs but as such no specific attempt has been made in the field of comparative study. Therefore, the present study is planned with the broad purpose of investigating the indicators of profitability & productivity of the banking sectors in Bangladesh. The specific objectives comprise find out the performance indicators of the banks, profitability, productivity aspects and relevant factors affecting the same during 1996-2005.

Objectives of the Study

The study is designed to achieve the following specific objectives:

To highlight the financial performance of NCBs, PCBs, SCBs & FCBs during 2000 to 2009.
To measure the profitability, branch productivity, employee productivity, & overall productivity & the relevant factors of selected banks during 1996 to 2005. .
To locate the SWOT MIX of the banks for the period under study.

Hypotheses of the Study

There is no significant difference of influencing factors of profitability among the selected banks during 2000-2009.
There is no significant difference in explaining profitability among the selected banks during 2000-2009.

Analysis & Interpretations of Data

Testing of Hypotheses

Hypothesis # 1: Factor Analysis: The general purpose of factor analysis is to minimize the information continued in a large number of variables in to a smaller number of factors. Each variable is expressed as a linear combination of the underlying factors. The following variables are used for the factor analysis;

V1 Total Advance to Total Deposits (TADVtTD)

V2 Total Investment to Total Deposits (TINVtTD)

V3 Total Income to Total Deposits (TItTD)

V4 Total Income to Total Advance (TItADV)

V5 Total Income to Total Investment (TItTINV)

V6 Total Income to Total Assets (TItTAsst)

V7 Net Profit to Total Deposits (NptTD)

V8 Net Profit to Total Advance (NptTAdv)

V9 Net Profit to Total Income (NptTD)

V10 Net Profit to Total Assets (NptTAss)

KMO and Bartlett’s Test (a) for NCBs, PCBS, SCBs & FCBs

Name of the Parameters

NCBs

PCBs

SCBs

FCBs

Kaiser-Meyer-Olkin Measure

Measure of Sampling Adequacy.

0.503

0.661

0.701

0.576

Bartlett’s Test of Sphericity

Approx. Chi-Square

529.294

541.633

597.998

563.394

Sig.

.000

0.00

Total Variance Explained (a)

Component

Initial Eigen values

Rotation Sums of Squared Loadings

Total

% of Variance

Cumulative %

Total

% of Variance

Cumulative %

3.866

42.954

3.775

41.948

2.411

26.788

69.742

2.235

24.834

66.782

1.248

13.869

83.611

1.515

16.829

83.611

.736

8.173

91.784

.537

5.971

97.755

.178

1.973

99.728

.012

.133

99.861

.009

.103

99.964

.003

.036

100.000

Extraction Method: Principal Component Analysis.

Rotated Component Matrix ( a, b )

Component of SCBs

Component of FCBs

INVTTD

0.874

-0.205

-0.152

INVTTD

-0.280

0.014

-0.921

TITTD

0.911

-0.137

-0.110

TITTD

0.398

0.704

-0.386

TITTADV

0.065

0.953

0.157

TITTADV

0.068

-0.864

-0.144

TITTINV

-0.190

0.149

0.885

TITTINV

0.575

0.500

0.485

NPTTD

0.930

-0.157

-0.040

NPTTD

0.755

0.576

0.143

NPTTADV

0.936

0.193

0.250

NPTTADV

0.769

-0.528

0.147

NPTTI

0.249

0.039

0.893

NPTTI

0.738

0.452

0.445

NPTTASST

0.935

0.128

0.256

NPTTASST

0.836

0.216

0.288

ADVTTD

0.463

-0.729

0.026

ADVTTD

0.026

0.971

0.066

TITTASST

0.048

0.974

0.094

TITTASST

0.855

-0.128

0.044

a Only cases for which BGROUP = NCBs are used in the analysis phase.

Only cases for which BGROUP =

(b)NCBs, PCBS, SCBs & FCBs are used in the analysis phase.

This shows the results of Kaiser – Meyer – Olkin (KMO) & Bartlett’s Test of profitability of NCBs, PCBS, SCBs & FCBs,based on the information of selected banks during 1996 -2005. High values (between 0.50 and 1.00) indicate that factor analysis is appropriate. Values below 0.50 imply that factor analysis may not be appropriate. KMO measures the sphericity of sampling adequacy as an index used to examine the appropriateness of factor analysis. In this case, KMO reveals the sampling adequacy indicating (Value of .0.50 < KMO < 1.00) i.e. 0.503, 0.661, 0.701 & 0.576 for NCBs, PCBS, SCBs & FCBsrespectively i.e. appropriate for the same.

Bartlett’s Test of sphericity is a test of statistics used to test the hypothesis that the variables are uncorrelated in the population. The population correlation matrix is an identity Matrix, each variable correlates perfectly with itself (r=1) but has no correlation with the other variables (r= 0). Bartlett’s Test of Sphericity indicates that the approximate chi-squire values are 529.294, 541.633, 597.998 & 563.394 for NCBs, PCBS, SCBs & FCBs respectively with 36 (df) for NCBs & PCBS, 45 (df) for SCBs & FCBs at 0.05 levels of significance. Hence, the factor analysis is considered as an appropriate technique.

Hypothesis # 2:

Model Summary of Regression

Model

Indicators

Ra2

Sig

VIF

NCBs

NP t TI- V9

TInv. t TD- V2

TI t TInv.- V5

0.786

0.619

0.587

19.458

0.00

1.254

1.277

1.276

PCBs

NP t TAdv.- V8

NP t TI - V9

Adv. t TD - V1

0.967

0.936

0.930

174.724

0.00

1.068

1.067

1.106

SCBs

NP t TAdv. - V8

TI t TAdv. - V4

NP t TI - V9

0.996

0.993

0.992

1630.717

0.00

1.324

1.084

1.278

FCBs

TI t TAsst - V6

Adv. t TD - V1

TI t Tinv. - V3

0.797

0.635

0.605

20.903

0.00

1.537

1.646

2.060

NCBs : On the basis of ‘Factor Loading Plot’ (SPSS) we have selected V9 (Net Profit to Total Income), V2 Total Investment to Total Deposit & V5 Total Income to Total Investment, to explain the profitability indicator of the selected Banks for the study period. The three selected variables collectively explained i.e. R= 0.786 percent of variations in profitability. The adjusted Ra2 is 0.587 percent. The range of VIF is from the lower of 1.254 to the higher of 1.277. This model may be applicable to enhance the profitability of the Banks in Bangladesh under the study.

PCBs : According to above table,we have selected V8 (Net Profit to Total Advance), V9 Net Profitto Total Income, & V1 Total Advance to Total Deposits, to explain the profitability indicator of the selected Banks for the study period. The three selected variables collectively explained i.e. R= 0.967 percent of variations in profitability. The adjusted Ra2 is 0.930 percent. The range of VIF is from the lower of 1.067 to the higher of 1.106. This model is properly used to enhance the profitability of the Banks in Bangladesh under the study.

SCBs : From the Factor Loading Plot’ (SPSS) we have selected V8 (Net Profit to Total Advance), V4 Total Income to Total Advance & V9 Net Profit to Total Income,to explain the profitability indicator of the selected Banks for the study period. The three selected variables collectively explained i.e. R= 0.996 percent of variations in profitability. The adjusted Ra2 is 0.992 percent. The range of VIF is from the lower of 1.084 to the higher of 1.324. This model is used for the same i.e. to enhance the profitability of the Banks in Bangladesh under the study.

FCBs : In point of this view,‘Factor Loading Plot’ (SPSS) we have selected V6 (Total Income to Total Assets), V1 Total Advance to Total Deposits & V3 Total Income to Total Investment, to explain the profitability indicator of the selected Banks for the study period. The three selected variables collectively explained i.e. R= 0.797 percent of variations in profitability. The adjusted Ra2 is 0.605 percent. The range of VIF is from the lower of 1.537 to the higher of 2.060. This model may be applicable to enhance the profitability of the Banks in Bangladesh under the study.

Controllable Factors : Lengthy procedures for providing loans & advances, Lack of proper customers’ services, Lack of manpower in the branch levels, Improper distribution of works, Lack of appreciation for better service & punishment for malpractices, Poor recovery, heavy outstanding classified advances & bad loan etc., Lack of legal rules for recovery of classified advances to sale mortgaged property, Improper systems for valuation of mortgaged property, Weakness for valuation of assets for mortgage property, Dishonesty of the Branch Manager, Honesty & sincerity of the officers are not properly considered at the time of posting period of the manager in the branch level, Lack of actual job satisfaction regarding promotion & transfer systems, Poor Reliability, Insincerity & non-cooperation of Sonali Bank in absence of BB regarding clearing service& other activities, Heavy trade union pressure, Simple/poor salary systems, Lack of modern tools & technology, Administrative weakness, Lengthy legal action systems, Job discrimination.

Uncontrollable Factors

Political unrest, Government decision, Natural disturbance, National Policies, Technological changes, Logistics support, Two days weekly holiday (Friday & Saturday) for BD, One day weekly holiday (Sunday) for foreign country i.e. three days & Three days are gap for global communication etc.

SWOT MIX FOR NCBs, PCBS, SCBs & FCBs

SWOT MIX for NCBs

Strengths: Wide branch image, govt. guidance, commitment to the customers, good feedback systems, good management competence, heavy competition etc. are the major strength of NCBs.

Weakness: Lack of motivation of employees, dependence on head office, lengthy network & weak ancillary services, chronic stuck-up advances and default culture, lack of good entrepreneurs, high cost of fund, promotion systems, no job satisfaction, poor salary structure then PCBs & FCBs, delay disbursement of sanctioned loans & technological barriers etc are the weaknesses of NCBs.

Opportunity: High demand for customer finance, relationship with rapid growth multinational companies, financial sectors reforms program made by Bangladesh Bank, increasing demand for foreign exchange etc. are the opportunities of NCBs. Threats: Unfair competition with PCBs & FCBs, rural & retail banking services, special rules & regulations, control on fund management, political unrests, dependence on govt.’s decisions, political violence & pressure, poor recovery performance due to willful defaulters, CBAs and trade union pressure & organizational discipline etc. are the threats of NCBs.

SWOT MIX FOR PCBs

Strengths : Urban oriented / district-wise branch, excellent management, high commitment to the customers, experienced & skilled manpower, sound HRM, sophisticated ATM system, good monitoring and proper supervision, social welfare attitude, good feedback systems, appropriate MIS & AIS, good management competence, strong principality & sound communication skilled etc have the strengths of PCBs.
Weakness: Dependence on head office for decision-making, chronic stuck-up advances and default culture, environmental constraints, excess liquidity, poor level salary structure than FCBs, accumulation of interest on loans, depreciation of the currency, no rural branch, no remuneration for overtime services, mentioned time is not maintained, misuse of telex, mobile, telephone, fax, AC, internet bills etc.
Opportunity: High demand for customer finance, Relationship management (Credit Management), relationship with rapid growing Multinational Companies & industries, Infrastructure Facilities, good FSRP prepared by Bangladesh Bank, high demand for foreign exchange, sound remittance, strong supervision of loan good monitoring systems, foreign services, highly decorated offices (Attractive offices), satisfactory two festival bonuses & two incentive bonuses per year, staff loan & consumers’ credit systems with minimum percentage of interest.
Threats : Unfair competition with some FCBs, Rules & Regulations of BB, Clients’ awareness for services, strictly controlled for fund management, pressure of market economy, environmental difficulties like hartal, political unrests, political violence & pressure, delay legal action & drastic action against fraud, poor job security, Misuse of communication cost etc.

SWOT MIX FOR SCBs

Strengths : Large scale Experienced Human Resource Management, social welfare attitude, good feedback systems, sound MIS & AIS, good management competence etc. are the strength of SCBs.
Weakness : Lack of motivation of employees, good monitoring and supervision, dependence on head office, poor communication network, improper teamwork, chronic stuck-up advances and default culture, lack of good entrepreneurs, environmental constraints, high cost of fund, lack of proper promotion systems & weak job satisfaction, privatization policy etc. are the weaknesses of the PCBs.
Opportunity: Poor demand for customer finance, investment potential of Bangladesh, relationship management, more infrastructure scope & simple demand for foreign exchange etc. Threats: Unfair competition, with NCBs, PCBs & FCBs limited services, regulated by Bangladesh Bank, pressure of market economy, environmental teats lockout, stick, political unrests, violence & pressure, lack of sufficient equity, misuse of telex, mobile, telephone, fax, ac cost, internet bills etc. are the major threats of SCBs

SWOT MIX FOR FCBs

Strengths : Strong & sound banking activities, excellent management & services, high commitment to the customers, highly qualified & experienced manpower, sound HRM, job satisfaction sophisticated e-commerce, good feedback systems, sound MIS & AIS, satisfactory networking systems by modern tools etc. are the major strength of PCBs.

Weakness: Limited branch & users, lack of good entrepreneurs, environmental constraints, excess liquidity, job satisfaction, proper salary structure as per market economy, lack of market information & relationship etc. are the major weakness of FCBs.

Opportunity: Demand for customer finance, investment potentiality, relationship management, rapid growth of multinational companies, increasing demand for foreign exchange etc. are the opportunities of FCBs

Threats: Unfair competition, with domestic books of inconsistency in banking services, special rules & regulations, customers awareness for services, controlling systems, environmental aspects, government policy, political concepts & privatization policy etc. have the major threats of FCBs.

Conclusion and Suggestions

It can be concluded that the all types of commercial Banks in Bangladesh show a greater fluctuation in profitability & productivity during 1996-2005. Although they had increasing trend of the same during 1996-2005 but the average profitability of the banks deteriorated during 2000-2001 compared to that due to absence of interest on classified advances. The banks reveal that the major reason for the reduction of profits of the banks is due to the introduction of financial sector reform prescribed by the Bangladesh Bank. If such system would have prevailed, there was little scope to show increasing profits in each of the Bank, excepting this there were differences in cost of fund, profitability, productivity etc. among the Banks. The major causes of decline in profit are high cost of fund, increasing idle fund, lack of opportunity for profitable investment of available fund, unorganized security market, more dependence on non-interest income, lack of good entrepreneurs and rapid industrial sickness etc. The causes of changes in productivity are mainly decreased deposits to investment, lack of training and motivation of its own manpower, lack of welfare facilities and rationalization of cost etc. To enhance the better profit of all the Bank, World Bank urged to introduce modified formula of loan classification in 1989 and another formula for appraising credit worthiness of a borrower in a specific format namely” Lending Risk Analysis” in 1993. These facilitated the productive uses of available funds leading to increase productivity and profitability of the Banks. This situation again improved slightly in 1995. On the other hand, the trend in productivity also showed similar picture with little exception in particular years. Virtually increasing cost of fund and change in income created adverse effect on both the variables.

Both regular loan repayment and willful loan default are habit forming in Bangladesh. In the case of micro-credit, regular repayment of loans has now become part of behavioral norm at the rural area in Bangladesh. It is also amazing how millions of transactions take place everyday in the micro-credit system with very few-reported incidence of financial irregularity or misappropriation. In contrast, there is alleged to be a very high incidence of corruption in the rural lending operations of the NCBs and the BKB and the repayment rates of such loans are also extremely low. Here, the formal banking system can perhaps learn something from the success of micro-credit. The loan transactions, for instance, can be made more transparent through some form of community involvement. Repayments could be made monthly, rather than six-monthly as at present, in order to and to avoid building up of repayment obligations and facilitate tighter monitoring.

About the Author

Lecturer Department of Management University of Rajshahi, Rajshahi 6205, Bangladesh. Tel: +880 721 750041, Fax: +880 721 750064

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