Banks' fight for economic freedom in independent Bangladesh

After gaining independence from Pakistan in 1971, Bangladesh's economic freedom still seemed quite far away as the newly-born nation reeled from the fallout of its struggle for that very independence.

It was the country's banking industry that played a leading role in building up the economic structure post-war. Banks, especially state-run ones, shaped our economy after independence by providing funding to the agricultural, industrial, service, and manufacturing sectors. Since then, the banking industry has been growing year after year to keep pace with economic development.

After the liberation war, Bangladesh had six nationalised commercial banks, three state-owned specialised banks and nine foreign banks. Now the country has six state-run commercial banks, three state-run specialised banks, nine foreign banks and 43 private commercial banks. 

Six nationalised banks were formed by merging 12 pre-independence banks. Sonali Bank was formed by the merger of Habib Bank and Commerce Bank, while Agrani Bank was formed by merging the National Bank of Pakistan, Premier Bank, and Bank of Bahawalpur. 

Janata Bank started its journey by merging United Bank and Union Bank; Rupali Bank was constituted with the merger of three erstwhile commercial banks — Muslim Commercial Bank, Australasia Bank, and Standard Bank.

The pre-independence Eastern Mercantile Bank was renamed Pubali Bank, while Eastern Banking Corporation became Uttara Bank. Soon afterwards, the activities of three specialised banks started to achieve the goal of industrial and agricultural development.

In the 1970s, the state-run banks of independent Bangladesh got off the ground to expand their branches for lending to the rural economy. In the mid-seventies, the total number of bank branches was around 1,600, which now stands at 11,153. With the increase in the number of banks, there has been a revolution in this sector through modernisation and digitisation, facilitating banking activities for clients.

In the 1980s, when the modern banking system was being built, private banks entered the market, which led to enormous growth in the banking business. Arab Bangladesh (AB) Bank is the first private sector bank in Bangladesh, which was set up in 1982. Then, National Bank emerged in 1983. Five more commercial banks popped up in 1983.

Bangladesh's economy has grown thanks to the ready-made garment industry, remittance, an increase in agricultural production, and the growth of SME enterprises; the banking industry played a significant role in all of these. 

The two biggest contributors to Bangladesh's economy are the ready-made garment industry (RMG) and remittances. When private banks entered the banking business, the country's businesses and economy did very well.

Our banking industry is working hard to help the government achieve the three primary goals of the Sustainable Development Goals (SDGs): the eradication of poverty, ensuring safe and nutritious food for everyone and ensuring good health and well-being.

The country's RMG industry has been growing rapidly due to the active role of banks. Banks are offering enormous facilities for the export-driven apparel sector. The RMG sector received the highest proportion of financing from banks after the country's independence. 

According to central bank data, from July to January of this fiscal year, export earnings for Bangladesh stood at $30.64 billion, of which $27.41 billion came from the ready-made garment industry. Private commercial banks, as well as state-run banks, give special emphasis to the garment industry when it comes to financing.

Since independence, our banking sector has played a vital role in agriculture, following the rules and policies set by the central bank for the agricultural industry, which in turn helps boost agriculture production. 

Every year, the Bangladesh Bank fixes loan disbursement targets for the agriculture sector and most of the banks exceed the target due to their willingness to lend to the industry. According to data from the central bank, the country's banks disbursed agriculture loans worth Tk28.83 crore against the target of Tk28.39 crore in the 2021–22 fiscal year. Agriculture production is growing every year thanks to the active role of banks.

The agro-based industry has flourished in recent years and is creating hope for export earnings and this is happening due to the funding of banks with the policy support of the central bank.

The Covid-19 pandemic demonstrated once again that the banking industry was the first to respond to any type of disaster. Amid the pandemic in the last two years, banks implemented a number of stimulus packages for the agriculture sector announced by the central bank. 

However, the agriculture sector's contribution to the country's economy continues to fall due to rapid industrialisation. After the liberation war, the agriculture sector was Bangladesh's main economic driving force and its input to GDP was around 60%. Its contribution has decreased over the last decade, going from 17% in 2010 to 12.6% in 2020.

On the other hand, since the country became independent, the industrial sector has been making a bigger and bigger contribution, and the financial sector, especially banks, has been crucial behind the scenes. 

The banks provide investible funds to both the public and private sectors, and they have played a significant role in economic growth. Now, the industrial sector makes up approximately 33.32% of the country's GDP, while the services sector makes up nearly 51%.

After 1971, a number of local private industrial groups expanded their businesses and industries with the financing of banks, such as Beximco Group, Bashundhara Group, Square Group, Pran-RFL Group, ACI Group, Abul Khair Group, City Group, Navana Group, Partex Group, Akij Group. A considerable number of people are employed in those groups of industries.

Banks play a significant role in facilitating remittances sent home by migrant workers as well. The remittance earned through banking channels continues to grow for various reasons, including the higher rate offered by local banks and the central bank's strengthened surveillance on hundi, the illegal cross-border transaction system. Remittances to Bangladesh averaged $1.4 billion from 2012 until 2023, reaching an all-time high of $2.6 billion in July 2020.

The World Bank's recent report said that Bangladesh had retained its position as the recipient of the seventh-highest amount of money transferred by migrant workers in 2021. This has been made possible by the active role played by banks.

At the moment, the banking industry faces challenges like weak management, bad governance, a lack of strong leadership, and not following ethical standards. This has led to different types of banking scams, money laundering and a rise in Non-Performing Loans (NPL). 

Even so, banks continue to play a big role in the growth and development of the country's economy and work hard to help the government reach its goal of making the country a developed one by 2041.

SM Parvez Tamal is the chairman of NRBC Bank