Evolution of banking in Bangladesh and the current status

The contiguous Muslim majority parts of the British Indian provinces of Bengal and Assam were carved out to form the eastern wing of Pakistan in 1947. But the partnership with the western wing did not last long.

At the time when Bangladesh was partitioned out of undivided India as the eastern wing of Pakistan, it inherited little overall growth with few bank offices most of which were headquartered in the western wing of Pakistan. Later, the quarter century partnership was severed and the year 1971 witnessed the emergence of Bangladesh as the new independent state that added another patch of color to the multicolored global map.

The origin of modern commercial banking is traceable in ancient times when the temples of Jerusalem were the hub of monetary transactions. Before the birth of the Christ, the Jews in Jerusalem introduced a kind of banking in the form of money lending. During the period, some sort of banking evolved around the place of worship as the people used to feel more secured with the priests or religious Gurus.

The Jews used to carry on money lending business sitting on the benches and the word 'bank' owes its genesis probably from 'bench'. The word 'bank' came into use widely in the 15th century.

1) Banking in pre-British period: (From the 14th century)

The Muslim businessmen from Kabul (known as the Kabuliwalas) came to India and started money lending business in exchange of interest sometime in 1312 AD. During the period, the indigenous bankers considerably influenced the economic activity of Bengal whose main business was transmission of revenues and making advance to the Govt. In course of time, their activities and importance had been declining over the years with the beginning of institutional banking facilities in the unbanked areas.

Banking facilities extended during the period were totally under private ownership. The 1st modern bank in European style in Dhaka was founded in 1846 as Dacca Bank. Subsequently, the Bank of Bengal opened its 1st branch in the eastern part of Bengal (now Bangladesh) late in 1862 and then opened two other branches in Serajgonj and Chittagong respectively in 1873.

But later, those two branches were closed in 1877. It needs to be mentioned that the Bank of Bengal along with other two banks (the Bank of Bombay set up in 1840 and the Bank of Madras set up in 1843) were later amalgamated to form the Imperial Bank of India by a special act in 1920. Gradually, the newly named imperial Bank of India spread its branches in different parts lying within Bangladesh that include  Dhaka (in 1862)/ Chittagong (in 1906)/ Mymenshing( in 1922)/ Rangpur  (in 1923) /Chandpur (in 1924)/ Narayanganj (in 1926).

The total number of bank offices within Bangladesh territory jumped from 149 in 1921 to 668 in 1946. It is the growth in national income that gave rise to bank office expansion. However, the growing trend of bank office expansion was suddenly reversed in the wake of communal riots and political disturbance of 1946. In consequence, as many as 100 bank offices in undivided Bengal (most of which were located in Bangladesh) ceased to operate.

From British India, Pakistan inherited "banking under private ownership"a significant portion of which had been operating in the areas lying within Bangladesh territory from 1846 till 1971.

The emergence of 2 independent dominions of India and Pakistan in August 1947 inflicted a great shock to the banking system of the erstwhile East Pakistan (now Bangladesh) that followed in the wake of shifting head offices and transfer of resources from the then East Pakistan to India by the non- Muslims who mostly owned the banking sector.

One year after partition in 1948, the eastern wing of Pakistan inherited only 2 branches out of 25 of Pakistani scheduled banks which established the debut instance of economic disparity between the east and the west.

No new bank was set up in the eastern wing till 1959 when Eastern Mercantile Bank was set up with head office in Chittagong and subsequently, in 1965 the Eastern Banking Corporation was set up with head office in Dhaka - both under the then East Pakistani entrepreneurship. This caused significant growth in bank deposit and in consequence, considerable improvement in other financial indicators.

Moreover, during 1954, per capita deposit, which was only 7.7 rupees in the Eastern wing, jumped to 44.86 rupees during 1970. However, prior to the liberation war in early 1971, per capita deposit was still found much bigger for West Pakistan - 4.7 times bigger than that of the Eastern part. All these prove beyond doubt the step brotherly treatment from the Western wing pervading every sector that inevitably kindled the mighty flame of liberation war in 1971.

After liberation, Bangladesh inherited a fragile banking system consisting of 2 Bangladeshi banks (with 155 branches), 10 Pakistani banks (with 920 branches) and 3 foreign banks (with 14 branches). Right after liberation, the owners and the top executives of Pakistani banks operating in Bangladesh left after they had transferred their resources to Pakistan.

This put a retardation on the growth of the banking sector of the country which was already in a fragile and unstable condition right after liberation. To satisfy the need of the time, several reforms were brought about one after another through Nationalization / Denationalization and Privatization / Shariah based Islamic Banking System / FSRP (Financial Sector Reform Project) / CBRP (Commercial Bank Restructuring Project) /Automation. 

4.1) Nationalization(1972): Under the Bangladesh Bank Nationalization Order 1972, all the commercial banks operating in Bangladesh and owned by the Bangladeshi and Pakistani citizens were restructured into 6 nationalized banks , namely Sonali, Agrani, Janata, Rupali, Pubali and  Uttara Bank. And the foreign banks were placed outside the orbit of nationalization. It needs to be mentioned that just after liberation, nationalization became incumbent on the part of the Govt. to take possession of the commercial organizations abandoned by the non-Bengalis.

Secondly, it was expedient on the part of the newly formed Govt. of Bangladesh to fulfil the political commitment of nationalizing all the banks and financial institutions including the industries. In the wake of nationalization, the banks were brought under rigid Govt. control and central bank regulations that covered fixation of deposit and lending rate, priority sector lending and expansion of bank branches, particularly in the rural unbanked areas.

The general objective behind the nationalization program was to ensure social justice and equity, equitable distribution of wealth, economic power and opportunities. But later on, for a variety of reasons, the spectacular achievement in the banking sector came to a halt. Wrong and imprudent policy monopolized the whole banking system.

During 1972-82, as per Govt. directives,   the banks and financial institutions pursued a policy of excessive credit expansion to priority areas in utter disregard of loan quality. Safe and sound credit policy was set aside in view of socio-economic considerations. Many rural branches were opened regardless of viability aspects.

Priority sector lending rates were kept at such a low level that it even did not cover the risk and other factor costs. As a result, huge amount of bank loan became stuck up. Bad debts swelled up to the unmanageable size and loan recovery drive was dismally poor. Ultimately, the Govt. was compelled to go back with a "U-turn"through adopting the policy of denationalization, deregulation and privatization.

4.2) Denationalization and Privatization (1982-83): The procedure of denationalization and privatization included 2 types of reforms - transfer of existing publicly owned assets to private sector and introduction of competition  between the NCBs (Nationalized Commercial Banks) and the newly emerging private banks. Arab Bangladesh Bank is the 1st private sector bank in Bangladesh set up in 1982 followed by National Bank Limited set up in 1983.

Also 2 NCBs - Uttara and Pubali Bank were denationalized and transferred to private ownership in 1983. Subsequently, 4 new banks- City Bank Limited/UCBL (United Commercial Bank Limited) / Islami Bank Bangladesh Limited / IFIC (International Finance, Investment and Commerce Bank Limited) joined the club of the private sector banks. (To be continued...)


The writer is a former general manager, credit information bureau, Bangladesh Bank