Banking Industry in Bangladesh: Its Contribution and Performance

journal of affair Research, vol. 3, 2001 This article is brought to you by www. bdresearch. org edgeing sphere of influence in Bangladesh Its Contri just nowion and execution of instrument Sharif Rayhan Siddique* A F M Mafizul Islam** Abstract The paper attempted to suck up the prospects and opportunities of deposeing orbit in Bangladesh. want otherwise sparing sector in the farming, buzzwording is one of major sectors which afford to the subject area delivery. The study tried to offer the overview of the deeds of shoreing sector and also find out the similarity among the various categories of banks with gaze to the inter makeability.Finally, the paper tried to establish the linear relationship among the various variables and meshing append of the banking sector. 1. Introduction fixing sector of Bangladesh is one of the major sectors, which contributes signifi advisetly to the matter parsimony. The sector comprises a tour of banks in various categories. Co nsidering ownership the sector can be classified in to four major categories much(prenominal) as Nationalized mercantile tills (NCBs), Specialized Banks (SPBs), Private Commercial Banks (PCBs), and Trans-National Banks (TNBs). The list of banks low different categories is furnished in the appendix A.The study has been initiated to analyze the donation of this sector and its simoleonsability. This paper attempts to entrust an overview of the parting of the sector in home(a) economy. The paper also analyzes the gatherability of different categories of banks. Finally a reasoning backward compend has been done to examine the relationship between the clamsability and other variables. 2. office of the Banking sector in National Economy sparing organic evolution of the country is executed by the contribution of various economic sectors. Like agriculture, industries, power, transport, rade service, etc. , banking sector also has a contribution to the economic evolution. I n mid 80s Banking and Insurance contributed 1. 69% of GDP and gradually the visit was increase. The level best contribution was 2. 09% of GDP in the category 1993 and it was 2. 00% in 1996-971 mediocre outgrowth rate of this contribution was 1. 51% of GDP, which shows a confident(p) trend. Again, the sector makes a confirming cushion on the economic development by generating employment. In the year 1980 total number of employees in this sector was 59,235 but with in 15 years of sequence the figure shoot approximately double to 101,444. The mediocre growth rate of employment gene balancen was 3. 76% (1980-1995). Countries interchangeable Bangladesh have a burden of its unemployment, where as banking sector unperturbed hold on certain impact on employment gene balancen. __________________________ * Assistant Professor, Institute of commerce Administration, University of Dhaka. ** Associate Professor, Institute of Business Administration, University of Dhaka. 1 Calculate d from the entropy undisturbed from Economic Trend, December 1997. 2 Ibid. 2 Banking Sector in Bangladesh Its Contribution and Performance Branches of the banks were also growing significantly.Increasing branches indicate a large-minded service provider to the population of Bangladesh. oerall growth rate of the bank branches was 2. 11% (1980-1995). simply before 1990 the rate was 3. 00% and after 1990 it was 0. 92%. In early 80s for the first succession Government of Bangladesh (GOB) allowed private sector to black market commercial banks. At that time number of bank branches was growing rapidly. In the early 90s this growth rate was reduced, which may be because of the saturation stage. Individuals and short letter organizations used to deposit their savings in the bank and borrow notes form it.More the bank branches more people can be cover to avail them in banking services. Average population per branch was 19,875 during the period from 1984 to 1995. Because of the high population growth rate (2. 22%),3 in spite of increasing branches, the population per branch was also increasing. Commercial banks are one of the moolah making organizations, they are also making silver by enthronement funds their deposits to the profitable venture through lending to the entrepreneurs. Commercial banks earn money from interest for loan and commissions and service charges for the services and it incurred white plague as well.Average profit per taka of spending was 0. 10. Before 1991 this figure was quite good, but after 1991 the ratio was negative up to 1993. Maximum figure was in the year 1982 that was 0. 23 and minimum was -0. 04 in the year 1991. Recently the ratio became 0. 07 in the year 1995. During 1991 to 1993 fire profit was negative. i. e. commercial banks spent more than earning but again they improved the situation by reducing their expenditure compared to income. Banks income generated by the optimistic efforts of their employees.Efficient empl oyees can earn more which observed a positive impact to profit generation. Income per employee can be one of the indicators of commercial banks performance. Average income per employee from 1980 to 1995 was Tk. 227,046, i. e. per employees contribution to income was more than Tk. 2 lacs. The ratio was increasing significantly with the total growth rate of 12%, to Tk. 371,297 in the year 1995. A country leads itself to the economic development by investing and producing more in the local area. enthronisation can be ensured through increased savings rate.Mo give the axeization ratio indicates a positive impact to the economic growth. This ratio is Broad Money to GDP. Average mo engagementization ratio was 28% of GDP, and it was growing significantly from 17% in the year 1981 to 35% in the year 1995. 4 Commercial banks, as a whole, performing well and contributing to the economic development of the country. The average positiveness of all banks collectively was 0. 09% during 1980 to 1995, which means profit Tk. 0. 09 earned by utilizing pluss of Tk. 100. In every aspect of profit, banking sector contributes to national economy as well as to the individual organization.Despite overall growth of the banking sector was positive, but the performances of different categories of banks were not equally attractive. Following region would compare analytically the performances of various categories of banks. _____________________________________________ 3 4 Calculated from the entropy collected from statistical divisionbook, 1996. Ibid. Journal of Business Research, Vol. 3, 2001 3 3. receiptsability of the Different Categories of Banks A Comparative Analysis Main focus of this comparison on last profit earned by the banks. expediency ratio, profit per taka of expenditure, profit per employee, profit per branch, profit per advance account, profit per taka of investment, profit per taka of deposit (savings), and per capita profit earned by the banks will be the vari ables for this analysis. Various groups of banks have different performances in hurt of profit. Average measures were metric for different categories of banks over the period from 1980 to 1995. 3. 1 win Ratio In solecism of profitability, i. e. union of profit per Tk. 100 of asset. The ratio indicates the effective utilization of assets.Performance of the organization can be evince by this ratio. Average profitability ratios for the various categories of banks during 1980 to 1995 were exhibited in the table below accede 1 improvement Ratio for Various Banks Banks Profit Ratio (%) NCBs 0. 08 SPBs -0. 32 PCBs 0. 13 TNBs 0. 71 Over all 0. 09 writer Adopted from info in Appendix B. The table indicated the performances in terms of utilization of assets in generating profit TNBs were the best. Specialized Banks had a very worst situation in utilizing of their assets, by showing negative average lowest profit.Though as of 1990 net profits were increasing positively, but from 1 991 to 1995 these net profit were gradually rock-bottom to negative because of their declining income. On the other yield TNBs performance was excellent as compared to overall banks performance. Average growth rate of net profit for TNBs was 39%, which was extremely good. 3. 2 Profit per Taka of Expenditure Banks earned profit by incurring expenditure for their subprograms. Effective usage of financial resources led to a commendable profit situation. How much profit earned by using up one taka is the measure of efficiency of an organization.Following table shows net profit per taka of expenditure for the different banks tabulate 2 Profit per Taka of Expenditure for Various Banks Banks Profit per taka of expenditure (Tk. ) NCBs 0. 029 SPBs -0. 092 PCBs 0. 033 TNBs 0. 307 Overall 0. 10 Source Adopted from data in Appendix B. 4 Banking Sector in Bangladesh Its Contribution and Performance Over all average profit was Tk. 0. 1 by incurring expenditure of Tk. 1. i. e. average retur n on expenditure was 10%. But in case of individual performance SPBs had negative average return on expenditure (-9. %), on the other hand TNBs performance (30. 7%) was preceding(prenominal) the industry average. Other than these two NCBs and PCBs close to(prenominal) had vulnerable situation. 3. 3 Profit per Employee Effective utilization of human resources produces higher return. Earned more profit by few numbers of employee indicates commendable performance of the banks and human efficiency. Since the temper of the industry is service oriented, so human efficiency depends on smart abilities of the employees. Following table shows the comparison among various banks Table 3 Profit per Employee for Various BanksBanks Profit per employee (Tk. ) NCBs 4,538 SPBs -34,216 PCBs 9,659 TNBs 285,659 Over all 12,88 Source Adopted from data in Appendix B. Over all profit per employee was Tk. 12,880, i. e. each employees average contribution to the net profit was Tk. 12,880 in a year. TN Bs as compared with overall, the figure was extremely good (Tk. 285,659). There are two indications for this picture, one is TNBs had extremely efficient employees, and other is less number of employees. On the other hand except SPBs (which had negative figure), NCBs average profit per employee was Tk. ,538, which was far below from TNBs, even below from overall performance, which shows un-utilized human resources. 3. 4 Profit per Branch in all categories of banks have numbers of branches covering wide range of the population of the country. To provide service to the wide range of people, banks have to establish multiple branches. Contribution to the total profit of different branches was varied, depending on the nitty-gritty of deposits and advances. Table below expresses average profit contribution by the branches. Table 4 Profit per Branch for Various Banks Banks Profit per branch (Tk. ) NCBs 6,205 SPBs -491,827 PCBs 181,548 TNBs 13,171,737 Over all 210,481 Source Adopted from data in Appendix B. 5 Banking Sector in Bangladesh Its Contribution and Performance Considering all commercial banks in Bangladesh, these were earned on an average Tk. 0. 064 from investing one taka. The average Return on enthronisation (ROI) was not inadequate (6. 4%) as compared to any business. In case of TNBs this rate was very attractive (12. 7%), but except SPBs, two NCBs and PCBs had 1. 2% and 2. 5% respectively. 3. 7 Per Capita Profit Commercial banks are run countrywide by offering services.Accumulating funds and distributing them to entrepreneur was the main give-up the ghost of commercial banks. Wider area coverage makes the commercial bank more prospering in terms of operation. Per capita profit earned by the commercial bank would indicate overall economic efficacy of banking system. Average profit gained per moderate can be expressed in the table below Table 7 Per Capita Profit for Various Banks Banks Per Capita Profit (Tk. ) NCBs 2. 53 SPBs -5. 25 PCBs 1. 46 TNBs 2. 51 Over all 10. 66 Source Adopted from data in Appendix B. Average profit per individual in the country for all banks was Tk. 0. 66, i. e. banking sector earns over Tk. 10 per head. But using same coverage for different categories of banks, the picture would be different. In case of NCBs operation they gained on an average Tk. 2. 53 per individual, where as TNBs earned Tk. 2. 51 per head. plainly these two figures were same but considering the coverage in terms of number of branches, NCBs have 170 time more branches than TNBs. 3. 8 Overall stead Considering all variables regarding profit, TNBs were doing extraordinarily good operation in this sector. Because of the policies and managements TNBs performance was better.Keeping TNBs aside, PCBs performance comparatively better. As far as the ownership was concerned both NCBs and SPBs were same. PCBs started their operations in 1982, before the Government of Bangladesh controlled that total financial sector. But after allowi ng private sectors to operate commercial banks, PCBs were gradually capturing the market share. astonishingly SPBs had negative performances in every aspect because of their negative net profit. 4. alliance of Profit With Other Variables In the above section comparison of profitability among various groups of banks has been discussed.But it was desired to know about the sensitivity of profit on various variables. Journal of Business Research, Vol. 3, 2001 6 Multiple regression analysis has been done to analyze the relationship between net profit as dependent variable and asset, expenditure, number of employees, number of branches, number of advance accounts, investment, time deposit are as individual variables. In this paper it was fancied that the relationship among the variables was linear, which is ? = A + B? + C? + D? + E? + F? + G? + H? . i) where, ? is net profit ? is number of employees ? is come in of expenditure ? is number of branches ? is amount of investment ? is am ount of asset ? is amount of time deposit ? is number of advance accounts A is constant The following section expressed the determination of coefficient of the fissiparous variables, which indicate the degree of influences on net profit by corresponding variables. 4. 1 Regression Result base on data provided in appendix C, the values of coefficients and constant were calculated and also found the relationship among them.Multiple linear regression equality is expressed in equation (ii). ? = 68459+0. 002 ? -0. 186 ? +0. 159? -0. 084? +0. 003? +0. 133 ? -1. 0310-6?. (ii) Above linear equation shows that several(prenominal) of the independent variables have positive relationship and others have negative. Amount of expenditure, amount of investment and number of advance accounts all have negative relationship with net profit. On the other hand amount of asset, number of employees, number of branches and amount of time deposit have positive relationship with net profit.Further, the strength of the relationship among the variables measured by the coefficient of determination (r2). The value was calculated as 0. 89, indicating very strong relationship. Therefore, the independent variables collectively may play grave role on earning net profit in the banking sector as a whole. 4. 2 Scope to Improve of Profit In the equation (ii), it was evident that some of the independent variables have positive impact on net profit, though the degree of influences was very low. Net profit may increases by increasing values, which have positive relations.From equation (ii), it was 7 Banking Sector in Bangladesh Its Contribution and Performance clear that number of employee, number of branches, amount of asset and amount of time deposit have positive relations with net profit. From above relationship, it can be explained that if number of employee increased by one, the net profit will increase by Tk. 0. 002 crores, i. e. every 1,000 employees can contribute Tk. 2 crores to net p rofit. This indicated that there might be still opportunities to generate employment in this sector and can contribute to the national economy.Again number of branches has also positive impact on net profit. equating (ii) reflects that increase in one branch may increase net profit by the amount of Tk. 0. 159 crores, which also testifies that there was still range of mountains to increase branches. In Bangladesh there were opportunities to establish branches in the rural areas where split of business potentials were looking for the banking service. Another variable the amount of asset has positive relationship with net profit. Even it has very little influences on profit every Tk. 1,000 crores of assets would increase net profit by the amount of Tk. 3 crores.Therefore, it was apparent that there was still room to increase the amount of asset to earn more profit. Finally, the amount of time deposit was other variable, which has positive influences on net profit. Coefficient of this variable in equation (ii) was 0. 133, this indicated that every Tk. 1,000 crores increase in time deposit would increase profit by the amount of Tk. 133 crores. Analyzing above relationship, time deposit has stronger influences on net profit. Therefore, banking sector as a whole may increase their contribution to national economy if the amount of time deposit was increased.Analyzing the regression equation it was clear that some of the independent variables have positive control over the generation of net profit, and also might increase the contribution of the banking sector to national economy by increasing the values of those variables. 5. Conclusion The performance of the banking sector in terms of net profit varies in various groups of bank. The study revealed that in every aspect, TNBs had a commendable performance. But comparing among other groups of banks (NCBs, SPBs, and PCBs), PCBs had favourite(a) achievement aiming profit. On the other hand Specialized Banks in Banglade sh had a very poor performance.This meager activity affected the overall banking sectors performance. The comparison among various categories of banks has been done on the basis of the profit with respect to some other variables. The study also revealed the relationship among the dependent variable and independent variables. The equation (ii) shows the weights of the independent variables that influences net profit of the banking sector. Finally, the paper intended to trace the scopes and opportunities of the factors by which over all net profit might increase, and contribute to the national economy.Journal of Business Research, Vol. 3, 2001 8 References 1. Mohammad Moqbul Hossain Bhuiyan. (1995). Managerial Effectiveness of Private Commercial Banks A Comparative use up. Journal of Business Studies, Vol. XVI, No-1, June. 2. Sujit Ranjan Saha. (1996). Ancillary Business and advantageousness of Banks Trends and Prospects. Bank Parikrama. Vol. XXI, Nos 1 & 2, March & June. 3. Tau fic Ahmad Choudhury and others. (1994). Comparative Characteristics of Profit Earning and Loss incur Rural Bank Branches in Bangladesh. Bank Parikrama. Vol. XIX, Nos 3 & 4, September & December. 4.Abdul Ghafar Ismail. (1993). deregulation and Bank Behaviour in Mixed markets. The Asian Economic Review. Vol. XXXV, No 2, August. 5. Dipendra Sinha. (1996). Savings and Economic Growth in India. The Asian Economic Review. Vol. XXXVIII, No 3, December. 6. Amar Chand Kaushik. (1996). Impact Study of Regional Rural Banks Credit on Income generation an d Poverty Alleviation in Rural Haryana. The Asian Economic Review. Vol. XXXVIII, No 1, April. 7. David Lynch. (1996). Measuring Financial Sector Development A Study of Selected Asia-Pacific Countries. The Developing Economics. Vol.XXXIV, No 1, March. 8. Schiller, Bradley R. (1994). The macro instruction Economy Today. Sixth Edition. McGrawHill Inc. , New York, USA. 9. McConnell, Campbell R. and Brue, Stanley L. (1993). Macro Economics. T welfth Edition. McGraw-Hill Inc. , New York, USA. 10. Fischer, Stanley. , Dornbusch, Rudiger. And other. (1988). Introduction to Macroeconomics. 2nd Edition. McGraw Hill, New York, USA. 11. Department of Statistics. (1997). periodic Economic Trends. Bangladesh Bank. December. 12. Bangladesh Bureau of Statistics. (1997). Statistical Yearbook of Bangladesh 1996. Seventeenth Edition. November. 9Banking Sector in Bangladesh Its Contribution and Performance Appendix A List of Banks a Nationalized Commercial Banks (NCBs) Agrani Bank Janata Bank Sonali Bank Rupali Bank Ltd. b Specialized Banks (SPBs) Bangladesh Krishi Bank Bangladesh Shilpa Bank Rajshahi Krishi Unnayan Bank c Private Commercial Banks (PCBs) Arab Bangladesh Bank Ltd. Islami Bank Bangladesh Ltd. National Bank Ltd. The city Bank Ltd. IFIC Bank Ltd. United Commercial Bank Ltd. Pubali Bank Ltd. Uttara Bank Ltd. Al-Baraka Bank Bangladesh Ltd. BSIC Bangladesh Ltd. Eastern Bank Ltd. National Credit and Commerce Bank Ltd.Prime B ank Ltd. Southeast Bank Ltd. Dhaka Bank Ltd. Al-Arafah Islami Bank Ltd. friendly Investment Bank Ltd. Dutch-Bangla Bank Ltd. d TNBs Hanil Bank Hongkong Bank Society general Bank American Express Bank Ltd. ANZ Grindlays Bank Plc. S tandard charter Bank State Bank of India Habib Bank Ltd. Citi Bank N A Banque Indosuez National Bank of Pakistan Muslim Commercial Bank Ltd. J ournal of Business Research, Vol. 3, 2001 10 Appendix B Various Data for PCBs Year 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 prelude Assets Net Profit Expenditure Employees BranchesAccounts (cror (cror Tk. ) (cror Tk. ) (no. ) (no. ) (no. ) Tk. ) 82 2132 1877 8 173 11562 628 8429 5202 14 245 11813 653 283320 6381 16 281 12756 693 267393 7768 22 366 13552 715 178460 7208 25 438 14810 771 160220 9072 14 594 16107 824 160834 9514 2 682 16916 865 165290 11059 (11) 765 17486 902 169549 12445 (8) 886 18034 942 84913 15502 12 819 17826 943 90599 15783 16 865 18806 grounds 102055 24190 72 90 7 19777 1047 117985 26794 Various Data for TNBs Net Advance Expenditure Employees Branches Year Profit Accounts (cror Tk. ) (no. ) (no. ) (cror Tk. ) (no. ) 1980 3 20 912 21 1882 1981 8 25 984 21 542 1982 11 32 999 21 2910 1983 12 45 1061 20 2888 1984 15 62 1042 20 3098 1985 18 77 1051 20 3610 1986 14 98 1064 22 3929 1987 22 119 1114 22 4144 1988 21 146 1124 22 4887 1989 7 147 1123 22 3971 1990 18 154 1135 22 3890 1991 25 99 789 18 2355 1992 38 65 826 18 2463 1993 54 92 826 18 3969 1994 68 106 888 19 6329 1995 90 146 926 23 9215 Investment (cror Tk. ) 76 293 346 327 396 506 554 787 750 653 879 1266 1439 Assets Investment (cror Tk. ) (cror Tk. ) 757 1280 1526 1476 1848 2281 2887 3245 4330 4697 4694 5575 4297 4377 5832 7111 51 70 109 118 156 163 177 196 ccc 279 358 340 228 203 260 266Related article Padma Bridge