Chapter-3
Conceptual Framework Of Bank
3.1 What is Bank?
A bank is a financial institution that is licensed to accept checking and savings deposits and
make loans. Banks also provide related services such as individual retirement accounts (IRAs),
certificates of deposit (CDs), currency exchange, and safe deposit boxes.
3.2 History Of Banking?
Ancient
The concept of banking may have begun in the times of ancient Assyria and Babylonia
with merchants offering loans of grain as collateral within a barter system. Lenders in ancient
Greece and during the Roman Empire added two important innovations: they
accepted deposit and changed [Link] for this period in Iran, Ancient
China and India also shows evidence of money lending
Medieval
The present era of banking can be traced to medieval and early Renaissance Italy, to the rich
cities in the center and north like Florence, Lucca, Siena, Venice and Genoa.
The Bardi and Peruzzi families dominated banking in 14th-century Florence, establishing
branches in many other parts of Europe. Giovanni di Bicci de' Medici set up one of the most
famous Italian banks, the Medici Bank, in 1397. The Republic of Genoa founded the earliest-
known state deposit bank, Banco di San Giorgio (Bank of St. George), in 1407 at Genoa, Italy.
Early modern
Fractional reserve banking and the issue of banknotes emerged in the 17th and 18th centuries.
Merchants started to store their gold with the goldsmiths of London, who possessed
private vaults, and who charged a fee for that service. In exchange for each deposit of precious
metal, the goldsmiths issued receipts certifying the quantity and purity of the metal they held as a
bailee ; these receipts could not be assigned, only the original depositor could collect the stored
goods.
Gradually the goldsmiths began to lend money out on behalf of the depositor, and promissory
notes (which evolved into banknotes) were issued for money deposited as a loan to the
goldsmith. Thus by the 19th century we find in ordinary cases of deposits of money with banking
corporations, or bankers, the transaction amounts to a mere loan or mutuum, and the bank is to
restore, not the same money, but an equivalent sum, whenever it is demanded and money, when
paid into a bank, ceases altogether to be the money of the principal (see Parker v. Marchant, 1
Phillips 360); it is then the money of the banker, who is bound to return an equivalent by paying
a similar sum to that deposited with him when he is asked for it. The goldsmith paid interest on
deposits. Since the promissory notes were payable on demand, and the advances (loans) to the
goldsmith's customers were repayable over a longer time-period, this was an early form
of fractional reserve banking. The promissory notes developed into an assignable instrument
which could circulate as a safe and convenient form of money backed by the goldsmith's promise
to pay] allowing goldsmiths to advance loans with little risk of default. Thus the goldsmiths of
London became the forerunners of banking by creating new money based on credit.
The Bank of England originated the permanent issue of banknotes in 1695. The Royal Bank of
Scotland established the first overdraft facility in 1728. By the beginning of the 19th
century Lubbock's Bank had established a bankers' clearing house in London to allow multiple
banks to clear transactions. The pioneered international finance on a large scale, financing the
purchase of shares in the Suez canal for the British government in 1875.
3.3 Bangladesh Bank
On 7 April 1972, after the Independence War and the eventual independence of Bangladesh, the
Government of Bangladesh passed the Bangladesh Bank Order , 1972 (P.O. No. 127 of 1972),
reorganising the Dhaka branch of the State Bank of Pakistan as Bangladesh Bank, the
country's central bank and apex regulatory body for the country's monetary and financial system.
The 1972 Mujib government pursued a pro-socialist agenda. In 1972, the government decided to
nationalise all banks to channel funds to the public sector and to prioritise credit to those sectors
that sought to reconstruct the war-torn country – mainly industry and agriculture. However,
government control of the wrong sectors prevented these banks from functioning well. This was
compounded by the fact that loans were handed out to the public sector without commercial
considerations; banks had poor capital lease, provided poor customer service and lacked all
market-based monetary instruments. Because loans were given out without commercial
considerations, and because they took a long time to call a non-performing loan, and once they
did, recovery under the erstwhile judicial system was so expensive, loan recovery was abysmally
poor. While the government made a point of intervening everywhere, it did not set up a proper
regulatory system to diagnose such problems and correct them. Hence, banking concepts like
profitability and liquidity were alien to bank managers, and capital adequacy took a backseat
In 1982, the first reform program was initiated, wherein the government denationalised two of
the six nationalised commercial banks and permitted private local banks to compete in the
banking sector. In 1986, a Commission National on Money, Banking and Credit was
appointed to deal with the problems of the banking sector, and a number of steps were taken for
the recovery targets for the nationalised commercial banks and development financial institutions
and prohibiting defaulters from getting new loans. Yet the efficiency of the banking sector could
not be improved.
The Financial Sector Adjustment Credit (FSAC) and Financial Sector Reform Programme
(FSRP) were formed in 1990, upon contracts with the World Bank. These programs sought to
remove government distortions and lessen the financial repression. Policies made use of the
McKinnon-Shaw hypothesis, which stated that removing distortions augments efficiency in the
credit market and increases competition. The policies therefore involved banks providing loans
on a commercial basis, enhancing bank efficiency and limiting government control to monetary
policy only. FSRP forced banks to have a minimum capital adequacy, to systematically classify
loans and to implement modern computerised systems, including those that handle accounting. It
forced the central bank to free up interest rates, revise financial laws and increase supervision in
the credit market. The government also developed the capital market, which was also performing
poorly.
FSRP expired in 1996. Afterwards, the Government of Bangladesh formed a Bank Reform
Committee (BRC), whose recommendations were largely unaddressed by the then-government.
At present it has ten offices located at Motijheel, Sadarghat, Chittagong, Khulna, Bogra,
Rajshahi, Sylhet, Barisal, Rangpur and Mymensingh in Bangladesh; total manpower stood at
5807 (officials 3981, subordinate staff 1826) as of 31 March 2015.
3.4 Functions of Bangladesh Bank
The Bangladesh Bank performs all the functions that a central bank in any country is expected to
perform. Such functions include maintaining price stability through economic and monetary
policy measures, managing the country's foreign exchange and gold reserve, and regulating the
banking sector of the country. Like all other central banks, Bangladesh Bank is both the
government's banker and the banker's bank, a lender of last resort". Bangladesh Bank, like most
other central banks, exercises a monopoly over the issue of currency and banknotes. Except for
the one, two, and five taka notes and coins which are the responsibility of the Ministry of
Finance of the Government of Bangladesh. 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 .
3.5 Types of Bank In Bangladesh
After the independence, banking industry in Bangladesh started its journey with 6 Nationalized
commercialized banks, 3 State owned Specialized banks and 9 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 that remain in the list of banks maintained under the Bangladesh Bank Order,
1972.
Non-Scheduled Banks:
The banks which are established for special and definite objective and operate under any
act but are not Scheduled Banks. These banks cannot perform all functions of scheduled
banks.
Scheduled Bank
State-owned Commercial Bank
means the commercial banks owned by the Recipient which propose to make or have made
a subgrant to a Dealer and which have entered into a Participating Bank Agree- ment with the
Recipient, and "State-owned Commercial Bank" means any one of them.
There are s which are fully or majorly owned by the Government of Bangladesh.
Specialized Banks (SDBs):
The specialized banks are defined as those banks that are banking operations that serve a
specific type of economic activity, such as industrial activity or agricultural or real estate,
under the resolutions of their establishment. Specialized bank does not have to accept
demand deposits of the main aspects of its activities.
Private Commercial Bank
Private commercial bank means the commercial banks other than commercial banks
owned by the Recipient which propose to make or have made a Subgrant to a Dealer and
which have entered into a Participating Bank Agreement with BI, and "Private Commercial
Bank" means any one of them.
1. There are 43 private commercial banks which are majorly owned by individuals/the
private entities. PCBs can be categorized into two groups:
2.
a)Conventional PCBs: 33 conventional PCBs are now operating in the industry. They
perform the banking functions in conventional fashion i.e interest based operations.
b)Islami Shariah based PCBs: There are 10 Islami Shariah based PCBs in Bangladesh and they
execute banking activities according to Islami Shariah based principles i.e. Profit-Loss Sharing
(PLS) mod.
Foreign Commercial Bank
Foreign Commercial Bank are those banks that are incorporated abroad, later they opened their
branch in Bangladesh. There are 9 FCBs operating in Bangladesh.
3.6 Some Banking Terms
Account
A type of financial property or financial obligation that is held and owned under account holder
name. When someone open a financial account—whether it’s a checking account, savings
account, CD or money market account—he/she have certain rights and responsibilities as an
account holder.
Joint account
An account with two or more owners that own the account equally, with the same rights and
obligations of using the account.
Savings account
A savings account may have been Someone’s first experience with the banking industry. He/she
have a number of options for where to stow savings safely, both at banks and credit unions.
Annual Percentage Rate
The total annualized cost of a loan. When someone borrow money, whether it’s via a credit
card, car loan or another loan, the lender is required to disclose the APR, so borrower understand
the full cost of borrowing the money.
Annual Percentage Yield( APY)
The annual yield earned on a deposit account, such as a savings, money market or CD account.
Savers can use APY as one of several factors to help determine which savings options are the
best.
Available balance
The amount of money someone have in his bank account that is available to spend or withdraw.
If someone have recently deposited a check or made purchases, those transactions may still be
marked as pending and may not be included in your available balance.
Check
A type of financial instrument that instructs the check writer’s bank to make a payment to the
recipient indicated on the check. Some people write paper checks and other people use their
bank’s online bill pay feature to issue electronically generated checks.
Checking account
checking account, sometimes referred to simply as a bank account, is a home base for making
financial transactions. The account can be interest-bearing, or non-interest-bearing, depending on
the bank or credit union.
Compound interest
When someone save money in an interest-earning account, such as a savings account or
CD, compound interest is the powerful financial effect that helps your savings grow over time.
With compound interest, savings multiply over time by earning interest on top of the principal
plus interest, year after year.
Credit
Credit generally refers to ability to borrow—the willingness of banks and other lenders to
extend a loan to someone.
Debit card
This is a payment method that’s connected to the checking account. Debit cards work similarly
to credit cards and can be accepted at the same points of sale, but the money that A/C holder
spend gets deducted from checking account balance.
Direct deposit
A payment method where people can sign up to have paychecks automatically deposited into
their account, without having to endorse and deposit a check. Many banks offer reduced fees to
customers who have recurring direct deposits.
Endorsement
To cash or deposit a check, Account holder must sign his/her name on the back. This is known
as an endorsement.
Fraudulent charges
Many banks have strong protections against fraudulent transactions. If a suspicious transaction
occurs on account, bank may prevent the payment from going through until they talk with A/C
holder to confirm that the purchase is valid.
Grace period
A certain amount of time when a borrower can delay making a payment on a loan or credit card
account without paying a penalty or incurring interest charges.
Investments
Investments are financial assets that are purchased and sold by investors, with the goal of
earning a return on investment (ROI).
Maturity date
This is the date of expiration for the contractual obligation of a financial instrument.
Overdraft
Something that occurs when someone make a purchase with his/her debit card or write a check
for an amount that exceeds his/her checking account’s available balance.
Solvency
When banks have enough money to cover potential losses. Banks are expected to maintain a
sufficient level of capital to remain solvent and avoid failure.
