- Nationalised commercial banks dominate the banking sector in Bangladesh, representing half of the industry’s assets and deposits.
- Sonali Bank acts as a clearing house for Bangladesh Bank, the central bank, in some 30 clearing locations or cities.
- Cash management is yet to be fully developed in Bangladesh and is hampered by the lack of electronic banking, poor communications and an unreliable postal system.
- Banks are now moving to meet the demand by corporates for complete cash management solutions.
From a mainly feudal agrarian base, Bangladesh has undergone a rapid economic structural transformation towards manufacturing and services. Industrial production growth has averaged more than 6 per cent over the past five years. The export sector, being the engine of this growth, has grown at an average rate of 30 per cent over the same period.
In 2002, the per capita gross domestic product (GDP) of Bangladesh was USD362. The average household income in the rural areas increased from USD927 in 1987-88 to USD1,438 in 1999-2000. Bangladesh has made progress in mass literacy, public health, self-employment support for the rural poor and the reduction of population growth. The increased participation of women in poverty alleviation programmes, as well as in the garment manufacturing sector, now provides jobs to more than one million women. An unparalleled concentration of innovative and committed non-governmental organisations has brought a micro-credit revolution and guided countless indigent women and landless households into income-generating activities.
Economic Markets Overview
The macroeconomics of Bangladesh have been fairly strong over the past decade, with GDP growth rates averaging a respectable 5 per cent. The primary fiscal deficit over the past five years has averaged about 5.5 per cent of GDP. Inflation, at an average of 9-10 per cent, has increased over the past few years, but foreign exchange reserves have stabilised and the fiscal deficit has been reduced. The economy in general is dominated by small businesses. The rate of national savings to GDP is low. The overseas aid environment has become more competitive.
Banking and Clearing Systems
The financial sector is dominated by private commercial banks. There are four types of scheduled banks in Bangladesh:
Figure 1: Scheduled Banks in Bangladesh
| Type of Bank | Number of Banks | Number of Branches |
|---|---|---|
| Nationalised commercial banks (NCBs) | 4 | 3,608 |
| Development financial institutions (DFIs) | 5 | 1,298 |
| Private commercial banks (PCBs) | 30 | 1,331 |
| Foreign commercial banks (FCBs) | 12 | 34 |
Source: Bangladesh Bank
The banking system continues to be dominated by NCBs, which have 47 per cent of the industry’s assets and 50 per cent of the deposits. Through their wide network of branches, NCBs are able to enjoy a larger deposit base. DFIs were created under a special mandate to address the financing needs of specific sectors such as agriculture and industry.
The clearing system in Bangladesh is governed by Bangladesh Bank (BB), which owns and manages the clearing houses and is responsible for clearing rules and regulations in the country. Clearing is between 10:00am and 6:00pm. Settlement is through BB in all seven clearing locations under its authority. An additional 30 clearing locations/cities carry out clearing through Sonali Bank (an NCB) on behalf of BB. Payments between banks are made by BB cheque, which is as good as cash. Out-of-city cheques are processed on a collections basis, which takes much longer.
All FCBs and some major PCBs are connected to the SWIFT system, which only operates with respect to international payments. SWIFT is yet to be implemented for local currency payments.
Bank Account Structure
Scheduled banks in Bangladesh offer a wide range of products and services including corporate, trade, investment and retail banking. The banks offer Bangladesh taka (BDT) savings and current accounts, which may be opened by both resident and non-resident Bangladeshis. BB regulations prohibit credit interest to be paid against deposits in current accounts.
Figure 2: Types of Bank Accounts Available in Bangladesh
| Account type | Local current | Local (short-term) deposit | Foreign Current | Foreign Deposit |
|---|---|---|---|---|
| Resident | Yes | Yes | Yes3 | Yes |
| Non-resident | Yes1 | Yes2 | Yes | Yes |
| Credit interest | No | Yes | No | Yes |
Source: Bangladesh Bank
Resident companies are permitted to borrow local currency, however non-resident companies are not allowed to borrow local currency from any scheduled bank. No foreign currency borrowing is allowed unless permission is given by BB.
Regulatory Framework
BB, the central bank, was established as a corporate body through the Bangladesh Bank Order in 1972. The primary objectives of the BB are to regulate the issue of the currency and keeping of reserves, and manage the monetary and credit systems of the country with a view to stabilising domestic monetary value. BB also promotes and maintains a high level of production, employment and real income in Bangladesh, as well as fostering the growth and development of the country’s productive resources for the national interest.
Currency Controls
The BDT is convertible for payments under documentary credit for the import of goods (except restricted items), with clearance from BB. Repatriation of capital and profits of joint-venture and other foreign-owned companies operating in Bangladesh is permitted, subject to reporting to BB with related supporting documents. BB also allows foreign airlines, shipping and courier companies operating in Bangladesh to remit surplus funds through the submission of statements to the respective bank. The remitting bank later take back the statements to BB on the client’s behalf.
Cash Management Overview
Cash management in Bangladesh is at a rudimentary stage. FCBs introduced cash management in the late 1990s to the multinational corporates. Since then, some FCBs have introduced electronic and Internet banking with real-time and end-of-day account balances, information services and reports from international sources, and payment and transfer facilities that allow clients to initiate book transfers. The regulatory framework allows bank-to-bank transfers through cheques or pay orders, but not through electronic or Internet banking between banks.
The range of cash management product offerings includes collections, payments, bulk payments, cheque warehousing, electronic and Internet banking, and sweeping for efficient liquidity management. These products are now also offered by PCBs with a smaller network of branches. These new-generation banks offer the products in the same manner as FCBs; however, due to the absence of electronic banking among PCBs, clients have yet to be facilitated. Products such as cross-border and cross-currency pooling and netting are specifically not allowed in Bangladesh.
Payments Management
The primary payment mechanism in Bangladesh is the cheque. There is no centralised clearing and settlement system for electronic funds transfer. Correspondent banking arrangements are available for the transfer of funds. Funds are usually transferred electronically between cities through telegraphic transfer. The NCBs and PCBs offer this service through their branch networks.
The use of pay orders and demand drafts is very common in Bangladesh. Pay orders are used for payment within the same city or clearing zone, whereas demand drafts are issued on behalf of any branch other than one in the same clearing zone or city.
Collections Management
Collections are mostly manual. The collection process in the clearing cities where BB operates is much faster. In clearing locations where Sonali Bank acts as the clearing bank, the funds are cleared within one to two days. All other locations may take more than five to seven days. Locally cleared cheques are subject to a deposit deadline (the close of business varies); the cheque amount is credited on the following day and funds are normally available two days after the deposit date.
Cheques sent to another city have to be cleared by the beneficiary’s bank branch. For example, a cheque deposited for processing in Dhaka and drawn on a bank branch in Jessore is sent to the paying bank branch in Jessore. A demand draft drawn on Dhaka is issued from the paying bank branch, which is later cleared in Dhaka.
Challenges to Payments and Collections Management
Despite the advances made in collections and payment by FCBs and PCBs, there remain a few major obstacles to cash management in Bangladesh.
The existing postal system is inefficient and unreliable. Sorting of mail is still manual and regular mail at times may take longer than scheduled. Telephone lines have yet to be installed in some parts of the country. However, private cellular operators have reached almost every corner of Bangladesh and have improved communications. Although the banking network has reached remote areas, efficient collection from these areas has yet to be implemented. Poor transportation to remote locations is one of the impediments to courier pick-up and timely collection.
Electronic Banking
Both proprietary and web-based electronic banking is available in the market, however electronic banking in Bangladesh has yet to be widely used. Only a few FCBs offer these services to corporate customers. Whilst FCBs continue to emphasise e-banking products, PCBs are moving towards automation in their banking systems and some are investing heavily in online and dial-up networks.
As the economy expands and becomes more sophisticated, a growing number of corporates are realising that the present payment and collection systems are not sufficient to manage their funds as efficiently as possible. Banks have also learned that to stay competitive it has become imperative for them to provide complete cash management solutions.
For most multinational group treasurers, the main requirement is for a suitable interface between the electronic banking system and their own corporate accounting systems. This allows the streamlining of payables and receivables for fully automated straight-through processing. The majority of foreign banks offer interfacing between systems and services that includes account information and reporting of fund transfers, trade services, electronic mail and account reconciliation.
Foreign Investment
Foreign investors are free to make investments in Bangladeshi industrial enterprise. An industrial entity may be set up in collaboration with local investors or even be wholly owned by the foreign investors. No permission is required for entrepreneurs to set up with their own funds. However, to make use of facilities and institutional support from the government, entrepreneurs are advised to apply for registration with the Board of Investment. Non-residents are free to invest in shares and securities quoted in the stock exchanges through foreign exchange sent or brought into Bangladesh. Shares may also be issued in favour of foreign investors against capital machinery. The following incentives are also provided to foreign investors:
- Foreign investors enjoy income tax exemptions of around five to seven years. Investors in the power generation sector receive income tax exemptions of 15 years.
- Foreign investors residing in countries with a bilateral agreement with Bangladesh can avoid double taxation on their income.
- Expatriate employees in certain industries, as specified in the income tax ordinance, can enjoy an exemption on income tax of up to three years.
- There is no import duty for export-orientated industries. Otherwise, import duty is 5 per cent ad valorem.
- Facilities are available for the full repatriation of invested capital, profit and dividends. A foreign investor may wind up investment in a company through a decision of an annual or extraordinary general meeting, and then by obtaining authorisation from the central bank.
Conclusion
Cash management in Bangladesh is yet to be recognised as a product-based solution for corporates. Impediments include the lack of automation of clearing or MICR (magnetic ink character recognition) clearing, real-time gross settlement, and the integration of electronic banking platforms with customers’ accounting systems among others.
Commercial lending products have become generic. Corporate customers today expect solutions to improve liquidity management and cash flows through product-based solutions offered by the FCBs. Upcoming developments in the country’s clearing systems will inevitably help customers benefit from their cash management bank’s transaction and electronic banking capabilities, which will improve their overall cash flow.
1 Private non-resident taka account: firms or companies resident outside Bangladesh.
2 Short-term deposit (seven to 30 days’ special notice): allowed only for foreign diplomatic missions, their expatriate personnel, foreign airlines and shipping lines operating in Bangladesh, international non-profit organisations including charitable organisations, United Nations’ organisations and their expatriate personnel.
3 If the resident draws a salary in foreign currency.