Department of Management Information Systems

Faculty of Business Studies

University of Dhaka

Course Name: [MIS: 502] Operations Strategy

Term Paper on
Future of Service Sector of Bangladesh:
A Case Study on Banking Sector of Bangladesh

Submitted to:
Dr. MD. Hasibur Rashid
Professor
Dept. of Management Information Systems
Faculty of Business Studies
University of Dhaka

Submitted by:
Name
Nusrat Jahan
Mohammad Mamunur Rashid
Md. Nizamul Karim
Tasnim Jahan
Md. Khairul Islam

Date of Submission: 17/01/2016

ID
06
19
37
55
69

17 January 2016
Dr. MD. Hasibur Rashid
Professor,
Department of Management Information Systems
Faculty of Business Studies
University of Dhaka
Subject: Submission of term paper on A Case Study on Banking Sector of Bangladesh.
Dear Sir,
Here is the term paper that we assigned on the topic as per your request. The term paper has been
completed by the knowledge that we have gathered from the course Operations Strategy
We are thankful to all those persons who provided us important information and gave us
valuable advices. We would be happy if you read the report carefully and we will be trying to
answer all the questions that you have about the assignment.
We have tried our label best to complete this term paper meaningfully and correctly, as much as
possible. We do believe that our tiresome effort will help you to get ahead with this sort of
venture. In this case it will be meaningful to us. However, if you need any assistance in
interpreting this assignment please contact us without any kind of hesitation.
Thanking you.
Yours obediently,
Nusrat Jahan

06-006

Mohammand Mamunur Rashid

06-019

Md. Nizamul Karim

06-037

Tasnim Jahan

06-055

Md. Khairul Islam

06-069

Executive Summary
Banking sector is an important component of the financial system that mobilizes resources for
productive investments in a country which in turn contributes to economic development. Over
the years the banking sector in Bangladesh has flourished in terms of the number of banks and
their branches, amount of asset and contribution to the economy. The sector has also undergone
several reforms and fallen under the jurisdiction of a number of acts for improving its efficiency.
Nevertheless, the sector in recent times has been plagued by various problems including
inefficiencies, malpractice and scams. This has impacted the soundness of the banking system in
the country and resulted in huge losses in the sector. While the sector is yet to recover from these
shocks, new challenges continue to appear in different forms. This term paper first addresses the
present conditions of the banking sector of Bangladesh then it shows the problems and proposes
the solutions to overcome the obstacles and go for a brighter future in this sector in Bangladesh.

Contents
Introduction .................................................................................................................................................. 1
Background ................................................................................................................................................... 2
Present Situation........................................................................................................................................... 4
Challenges faced by Banking Sector of Bangladesh...................................................................................... 9
Suggestion ................................................................................................................................................... 11
Implementation of Strategies ..................................................................................................................... 12
Conclusion ................................................................................................................................................... 15

Introduction
Banking is the inevitable part of an economy and plays a major contribution towards socioeconomic development of a country. The sector is considered as life blood of the economy as
well. As one of the most important sectors of the financial system, it forms the core of the money
market and plays very dynamic role in mobilizing resources for productive investments in a
country, which in turn contributes to economic development. An efficient and stable banking
system is the prerequisite for overall development of the country.
Bank means an establishment authorized by a government to accept deposits, pay interest, clear
checks, make loans, act as an intermediary in financial transactions, and provide other financial
services to its customers.
The Jews in Jerusalem introduced a kind of banking in the form of money lending before the
birth of Christ. The word bank was probably derived from the word bench as during ancient
time Jews used to do money lending business sitting on long benches. First modern banking was
introduced in 1668 in Stockholm as Savings Pis Bank which opened up a new era of banking
activities throughout the European Mainland. In the South Asian region, early banking system
was introduced by the Afghan traders popularly known as Kabuliwallas. Muslim businessmen
from Kabul, Afghanistan came to India and started money lending business in exchange of
interest sometime in 1312 A.D. They were known as Kabuliwallas.
The banking sector is the section of the economy devoted to the holding of financial assets for
others, investing those financial assets as leverage to create more wealth, and the regulation of
those activities by government agencies.

1|Page

Background
The financial system of Bangladesh is comprised of three broad fragmented sectors:

Formal Sector,
Semi-Formal Sector,
Informal Sector.

The sectors have been categorized in accordance with their degree of regulation.
The formal sector includes all regulated institutions like Banks, Non-Bank Financial Institutions
(FIs), Insurance Companies, Capital Market Intermediaries like Brokerage Houses, Merchant
Banks etc.; Micro Finance Institutions (MFIs).
The semi-formal sector includes those institutions which are regulated otherwise but do not fall
under the jurisdiction of Central Bank, Insurance Authority, Securities and Exchange
Commission or any other enacted financial regulator. This sector is mainly represented by
Specialized Financial Institutions like House Building Finance Corporation (HBFC), Palli Karma
Sahayak Foundation (PKSF), Samabay Bank, Grameen Bank etc., Non-Governmental
Organizations (NGOs and discrete government programs.
The informal sector includes private intermediaries which are completely unregulated.
Bangladesh Banking Sector
After the independence in 1971 the banking sector of Bangladesh started its journey with a new
dream and new commitment towards equity and social justice along with growth and
development. The newly independent government immediately designated the Dhaka branch of
the State Bank of Pakistan as the central bank and renamed it as Bangladesh Bank. 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 new banking system succeeded in establishing reasonably
efficient procedures for managing credit and foreign exchange.
After the independence, banking industry in Bangladesh started its journey with 6 nationalized
commercialized banks, 2 State owned specialized banks and 3 Foreign Banks. In the 1980's,
banking industry achieved significant expansion with the entrance of private banks.
Now, banks in Bangladesh are primarily of two types:

Scheduled Banks: The banks which get license to operate under Bank Company Act,
1991 (Amended in 2003) are termed as Scheduled Banks.

2|Page

Non-Scheduled Banks: The banks which are established for special and definite objective
and operate under the acts that are enacted for meeting up those objectives, are termed as
Non-Scheduled Banks. These banks cannot perform all functions of scheduled banks.

There are 56 scheduled banks in Bangladesh who operate under full control and supervision of
Bangladesh Bank which is empowered to do so through Bangladesh Bank Order, 1972 and Bank
Company Act, 1991. Scheduled Banks are classified into following types:

State Owned Commercial Banks (SOCBs): There are 5 SOCBs which are fully or
majorly owned by the Government of Bangladesh.
Specialized Banks (SDBs): Four specialized banks are now operating which were
established for specific objectives like agricultural or industrial development. These
banks are also fully or majorly owned by the Government of Bangladesh.
Private Commercial Banks (PCBs): There are 39 private commercial banks which are
majorly owned by the private entities. PCBs can be categorized into two groups:
Conventional PCBs: 31 conventional PCBs are now operating in the industry. They
perform the banking functions in conventional fashion i.e interest based operations.
Islami Shariah based PCBs: There are 8 Islami Shariah based PCBs in Bangladesh and
they execute banking activities according to Islami Shariah based principles i.e. ProfitLoss Sharing (PLS) mode.
Foreign Commercial Banks (FCBs): 9 FCBs are operating in Bangladesh as the branches
of the banks which are incorporated in abroad.

Figure: Classification of Banking Sector

3|Page

Present Situation
Bangladesh economy is now moving on a path of rapid and sustained growth. In fact the
structural changes under the constraints imposed by the process of global integration, the
management is channeling productive resources towards the achievement of a higher rate and
quality of growth. Despite political agitation early in 2015 that adversely affected transport
services, exports, and private investment, growth in Bangladesh held up well because of brisk
domestic demand, boosted by higher worker remittances, private sector wages, and public
investment.
At present, economy of Bangladesh is passing through a good time with some favorable
economic indicators such as macroeconomic stability (Ba3 -stable outlook rating by Moodys for
six consecutive years), modest low cost concessional external borrowing, ample foreign
exchange reserve, declining inflation rate, declining interest rate of loan, stable foreign exchange
rate, controlled budget deficit, surplus in Balance of Payment, less pressure in government
subsidy etc. But, we are moving around the GDP growth rate of 6% over the last decade which is
not improving significantly.
The GDP Growth rate of Bangladesh has been around 6.52% in the fiscal year of 2014-15.
Which showcases the positive growth of the countrys economy as well as the wellbeing of the
banking sector of the country.
In the Banking sector of Bangladesh the central bank named Bangladesh Bank holds the supreme
power of controlling the entire banking sector. Bangladesh Bank performs all the core functions
of a typical monetary and financial sector regulator, and a number of other non-core functions.
The major functional areas include:

Formulation and implementation of monetary and credit policies.

Regulation and supervision of banks and non-bank financial institutions, promotion
and development of domestic financial markets.
Management of the country's international reserves.
Issuance of currency notes.
Regulation and supervision of the payment system.
Acting as banker to the government.
Money Laundering Prevention.
Collection and furnishing of credit information.
Implementation of the Foreign exchange regulation Act.
Managing a Deposit Insurance Scheme.

4|Page

The present condition of the banking sector is shown by the following points:
In recent times we have not seen any significant structural reform in banking sector however we
have found some small initiatives from Bangladesh Bank to introduce new product lines.
Ensuring Capital Adequacy Ratio of 10% has become challenging for few banks where BASEL
III will require ensuring Capital Adequacy Ratio of 12.5% including additional 2.5% of RWA as
Capital Conservation Buffer. Traditionally, 85% of the income of bank comes from interest on
loan. Interest rate of banking sector is comparatively quite low now as a whole but it seems
burden for the small investors yet. The Government and Bangladesh Bank together are trying to
cut bank interest rate to 9% or below from the existing effective interest rate of 18% to 22%. The
highest interest rate paid by Financial Institutions is 10% and the spread is around 5% to 7%. The
reasons for high spread are high operating cost, financial depression, lack of adequate
competition, market power of few large dominant banks, high inflation rate, high risk premium
due to high risk of most borrowers, burden of Non-Performing Loan, limitations in using Open
Market Operation etc.
High interest rate spread increases the likelihood of NPLs. It causes inflation increasing cost of
production or cost of goods sold. Opening Back to Back L/C and machinery import have
increased to support investment. Private commercial banks are the major market share holders in
trade facilitation. They have contributed over four -fifths of export proceeds and three-fourths of
import payments during current fiscal year. PCBs also dominate as a major market share holders
in trade financing, remittance services and maintaining foreign currency accounts.
Foreign Reserve: At end-September 2015, the gross foreign exchange reserve reached to USD
26.4 billion, an increase by 5.4 percent from the USD 25.0 billion recorded at end-June 2015.

5|Page

Interest rate Spread: The interest rate spread between the weighted average lending and deposit
rates slightly decreased to 4.8 percent in September 2015 from 4.9 percent of the preceding
quarter; the weighted average lending rate, during the quarter was recorded as 11.5 percent while
the deposit rate as 6.7 percent. Pertinently, in the review quarter, both the lending and deposit
rates slightly declined.

Foreign Direct Investment: Foreign Direct Investment in Bangladesh increased by 1504 USD
Million in 2014. Foreign Direct Investment in Bangladesh averaged 861.31 USD Million from
2002 until 2014, reaching an all-time high of 1726 USD Million in 2013 and a record low of 276
USD Million in 2004. Foreign Direct Investment in Bangladesh is reported by the Bangladesh
Bank.
Assess Structure of Banking Sector: The balance sheet size of the banking sector grew by
almost 3.2 percent and reached BDT 10,001.2 billion at end-September 2015. Loans and
advances, as a percentage of total assets recorded a minor decrease, and investments recorded a
slight increase compared with end-June CY15.

6|Page

Profitability: Both the return on assets (ROA) and return on equity (ROE) increased by 15 and
166 basis points respectively, at end-September CY15 from the previous quarter and reached at
0.57 and 6.57 percent respectively. Almost 87.5 percent of the banks had a ROA of less than 2.0
percent, while 12.5 percent of banks had a ROA higher than 2.0 percent. On the other hand, 58.9
percent of the banks had a ROE higher than 5.0 percent.
The condition of the current reserve rate, SLR, CRR, remittance, import and export condition of
Bangladesh in terms of Banking sector is concerned is shown below by the chart:

Sovereign Ratings of Bangladesh: Bangladesh achieves Ba3 (Moody's) and BB-(Standard and
Poor's) with stable outlook for the 6th consecutive years. Stable real GDP growth and strong
external balances have helped Bangladesh to achieve BB- rating with stable outlook from Fitch
Ratings for the second time.
Capital Adequacy: Under the Basel-III framework, banks in Bangladesh were required to
maintain a capital to risk-weighted assets ratio (CRAR) of at least 10.0 percent and Tier-1 capital
ratio of at least 5.5 percent in the review quarter. The banking sector aggregate CRAR at endSeptember 2015 was 10.5 percent, slightly higher than the minimum requirement of 10.0 percent
and 20 basis points higher than the ratio recorded at end-June 2015. The Tier-1 capital ratio was
8.0 percent as opposed to 7.9 percent recorded at end-June 2015. Notably, the ratio is
significantly higher than the minimum regulatory requirement of 5.5 percent.

7|Page

Liquidity: During the review quarter of CY15, banking sector as a whole maintained required
levels of CRR and SLR. It is to mention that, the conventional banks are recommended to
maintain an Advance-to-Deposit Ratio (ADR) up to 85 percent while the Islamic Shari'ah banks
are recommended for 90 percent.

Figure: CRR of Banking Sector as per September 2015

Figure: SLR of Banking Sector as per 2015

8|Page

Challenges faced by Banking Sector of Bangladesh

Banking is the inevitable part of an economy and plays a major contribution towards socioeconomic development of a country. The sector is considered as life blood of the economy as
well. As one of the most important sectors of the financial system, it forms the core of the money
market and plays very dynamic role in mobilizing resources for productive investments in a
country, which in turn contributes to economic development. There are some challenges that face
bank sectors of Bangladesh. Now we are discussing about the Challenges faced by banking
sector:
Banking sector of Bangladesh is highly politicized. Any government come the power takes
some quick but unethical decisions. Firstly, they appoint most of chairpersons directors of all
banks and financial institutions under their control based on political identity. Secondly they
create some new banks and financial institutions under the leadership of their political friend and
partners. In most of the cases these appointees are unqualified and inexperienced, technically
unsound and politically motivated and in some cases greedy and dishonest.
The image of the banking industry has many times been tarnished by several stories regarding
the owners in recent media releases. Despite the considerable progress made, foreign countries
are still somehow treating our banking industry activities as questionable. In a recent report the
IMF has mentioned Bangladesh Bank as a weak central bank because of its insufficient measures
to control the banking industry of Bangladesh. However Bangladesh Bank, in spite of its
limitations, is trying hard to bring discipline in the banking sector.
In the backdrop of this shortage unhealthy and unethical practice of hunting from a sister bank
has become a regular phenomenon, which creates misunderstanding among friendly
organizations.
Countering the image issue is not the only block in the road to developing a respectable and
successful institution, there are also the problems of 2 Ps 3Cs and a T- people, product,
compliance and ethics, competition, change management and technology among others.
Unhealthy Competition. Though someone may differ, competition in Bangladesh seems to be the
deadliest in all sectors of the economy. It not only brings in positive developments but also
encourages malpractice.
Bangladesh Bank, as the major regulator of the financial system of the country plays a pivotal
role to stabilize and enhance the efficiency of the financial system. Considering money
laundering (ML) and terrorist financing (TF) as one of the major threats to the stability and the
integrity of the financial system.

9|Page

Some challenges are arising for the next FY 15-16 that may include:

One of the problems that banks, particularly state-owned commercial banks face at
present is that of dealing with the high volume of non-performing loan.
Whitening the black money
Easing the income tax return
Training and development of teachers of primary and secondary schools
Reducing corporate tax
Utilization of internal resources
Implementation of modernization plan of government revenue collection
Identifying and removing tax fraud by NBR
Decentralization of national budget to districts level
Cutting yield rate of hot selling savings tools
Implementing the conditions arising from budgetary support of World Bank.

Competition in the banking industry is also hitting from the capital market end, with the
corporates increasingly going to the equity market to rise funding. This not only hits the banks in
the belly by affecting their core business but also indirectly affects their contribution to market
cap which dropped from 59% in 2007 to less than 25% in June 2010.
More importantly it forces them to risk their position by over exposing them to volatile capital
market through proprietary trading and position taking in order to maintain profitability. Lack of
Skilled Human resources banking as a most modern and sophisticated financial service industry
badly needs skilled human resources who will not only service old products but will also create
and launch new innovative products. Educating the market remains the first requirement towards
creating new products and developing skilled human resources.
Besides people and product issues, the bank officials need to be ever vigilant about the everchanging technology and regulatory requirements.

10 | P a g e

Suggestion
Bangladesh is holding the second position in foreign currency reserve among the members of
SAARC.
At present, economy of Bangladesh is passing through a good time with some favorable
economic indicators such as macroeconomic stability (Ba3 -stable outlook rating by Moodys for
six consecutive years), modest low cost concessional external borrowing, ample foreign
exchange reserve, declining inflation rate, declining interest rate of loan, stable foreign exchange
rate, controlled budget deficit, surplus in Balance of Payment, less pressure in government
subsidy etc. But, we are moving around the GDP growth rate of 6% over the last decade which is
not improving significantly.
The banking sector could be our pride and a major growth engine of the economy. Regulators
need to take appropriate decisions and measures to implement proper regulations at the right
time.
An appropriate example is when several financial institutions shifted towards the riskier capital
market to counter the lower growth in their core businesses using the depositors money, the
regulators aptly stepped in to make merchant banks separate subsidiaries. The regulations are
there. The problem is enforcing them in an honest manner. If the regulators and the legal system
were honest then all these recurring image issues and malpractices could have been avoided.
Facing the challenges head-on in a compliant manner should be our goal towards creating a
sustainable, profitable and forward-looking banking sector. We need to do more and run faster
with clear visibility about the destination. Perhaps, it also has to do a lot with the overall
governance and accountability situation in the country.

11 | P a g e

Implementation of Strategies
The banking industry is a vital player in the health of the global economy, and its future will be
decided by the actions of todays senior managers. They have to decide if they leave behind a
legacy of change and renewal and if they be remembered as the industry captains that simplified
complexity, innovated valuable new services, built a reputation as trusted advisors to customers,
improved the banking experience for everyone, and attracted a new wave of young talent to the
industry.
Its important to reflect on broad issues that implementation involves. The structure that is used
to reflect the broad issues is known as five Ps. It identifies some of the key elements that
characterize the strategy formulation process generally but it also provides a useful structure for
examining implementation. (Adapted from: Nigel Slack and Michael Lewis, operations strategy,
chapter: the process of operations strategy)
The Five Ps is as follows:
1. Purpose: A shared understanding to the relative changes in market position and operations
resource capabilities, as well as the motivation, boundaries and context for developing the
operations strategy is crucial.
To control the pure and speculative risk factors a bank should focus on 3 types of strategies:
a)Prevention strategies: Where an operation seeks to completely prevent (or reduce the frequency
of ) an event occurring
b) Mitigating strategies: where an operations seeks to isolate an event from any possible negative
consequence
c) Recovery strategies: where an operation analyses and accepts the consequences from an event
but undertakes to minimize or alleviate or compensate for them.
2. Point of entry: Any analysis, formulation and implementation process is potentially
politically sensitive and the support of that the process has from within the hierarchy of the
organization is central to implementation success.
four types of central operations functions are focused when implementing the strategies:
#top-down or bottom up?
#market requirements or operations resource focus ?

12 | P a g e

3. Process: The formulation process of operations strategy must be explicit. It is important that
the manager who is engaged in putting the operations strategies together actively think about the
methodology that is being used. 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.
Three basic aspects need to be focused when scrutinizing the Process factor:
a)the process of achieving successful alignment of market requirements with operations
resources
b)the process of using substitutes for strategy
c)the process of implementing operations strategy
4. Project management: Devising and implementing operations strategy itself is a project and
needs to be managed as such. The basic disciplines of project management, such as stakeholder
management, resource and time planning, controls, communication mechanisms, reviews and
son should be in place.
Whenever a change has to be made the key to success lies in successful implementation. This
means change for the way the bank operates and the way people work. It upsets the status quo

13 | P a g e

for some senior managers. It will be a challenge to adapt a product centric culture to a new
customer-centric way of working.
Three aspects need to be focused which determines the degree of difficulty in project
implementation:
a)Scale
b)complexity
c)uncertainty
5. Participation: Intimately linked with the above points, the selection of staff to participate in
the implementation process is also critical.so, for instance, the use of line managers and staff can
provide 'real world' experience and inclusion of cross functional managers can help to integrate
the finished strategy. Change on this level requires strong leadership. It cannot be achieved with
a simple directive or surface adjustment in people policies. It requires an innovative rethink of
the entire management system, in a strong partnership between bank leaders and their change
agents. New systems and policies must support the strategy to be successful. The real test of a
good strategy implementation plan is whether the people understand the strategy, are motivated
and enabled to implement it, and actually start achieving its goals.

14 | P a g e

Conclusion
At last it can be said that after several reforms in the banking sector since the eighties, the
banking sector had begun to exhibit some signs of improvement in a few areas. However, recent
shocks have exposed the fragility of the sector and pointed out that reforms in the sector have
been incomplete.
If the banking sector has to contribute to the economic growth of the country through mobilizing
resources for investment in productive sectors, it needs a massive overhauling and clean up. The
required measures can be categorized into three broad areas
(i)
(ii)
(iii)

Strengthening internal governance of banks;

Improving oversight function;
Removing political influence.

As the country desires to step into a higher growth momentum through exploring its potentials,
the demand on the banking sector will continue to be higher in the coming days. This reiterates
the need for improved efficiency of the sector. This has become important also due to the fact
that the global regulatory environment is becoming tighter, the global economic environment
facing more volatility and resources are becoming scarce. There will be demand for higher
capital and skilled human resources for smooth functioning of banks and for ensuring
compliance in the future. Hence the banking sector in Bangladesh will have to focus on using
both its financial and human resources in a far more innovative, judicious and efficient way to
cater to the future demand.

15 | P a g e

Bibliography
Bangladesh Bank, 2016. Overview of Financial system of Bangladesh. [Online] Available at:
https://www.bb.org.bd/fnansys [Accessed 5 January 2016].
Bangladesh Financial Intelligence Unit, 2015. MANAGING CORE RISK. Research. Dhaka: Bangladesh Bank
Bangladesh Bank.
businessdictionary.com,
2016.
bank.
[Online]
Available
http://www.businessdictionary.com/definition/bank.html [Accessed 5 January 2016].

at:

Islam, P.M.M., 2015. Banking sector of Bangladesh: Past, present and challenges ahead. Dhaka: The New
Nation Dept of Banking and Insurance,University of Dhaka.
Khatun, D.F., 2015. Banking sector in search of respite. Dhaka: The Daily Star The Daily Star.
Rahman, A., 2015. Vibrant Bangladesh: A Stable and Paotential Economy. Research. Dhaka: Bangladesh
Bank Bangladesh Bank.
Rahman, D.A., 2016. Green Finance for Sustainable Development. In Bangladesh Solar and Renewable
Energy Association. Dhaka, 2016. Bangladesh Bank.
Rahman, D.A., 2016. Monetary Policy Statement H2, FY2016. In Opening Speech of the Governor,
Bangladesh Bank. Dhaka, 2016. Bangladesh Bank.
Slack, N. & Lewis, M., 2010. Operations Strategy. 3rd ed. Essex: Pearson Education Limited.
UNEP & Bank, B., 2015. Designing a Sustainable Financial System in Bagladesh. Inquiry: Design of
Sustainable Financial System, pp.5-16.

16 | P a g e