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The Digital Banking Revolution in Bangladesh

Today, information and communication technology has become the heart of banking sector and banking industry is at the heart of every robust economy. Electronic banking system has become the main technology driven revolution in conducting financial transactions. The modernization of ICT has set the stage for extraordinary improvement in banking procedures throughout the world. For instance the development of worldwide networks has considerably decreased the cost of global funds transfer. Banks that are using ICT related products such as online banking, electronic payments, security investments, can deliver high quality customer services with less effort. Technology has already enabled most of the banks in Bangladesh to introduce innovative products to their customers in the form of ATM/POST facility, Mobile/Tele banking, Web banking, ‘Anytime’ and ‘Anywhere’ banking, etc. Customers of banks have felt the positive impact of technological solutions implemented by banks. Banks play a vital role in developing the economic and social conditions of a country. The major share of the profit of banks generally comes from spread. But the profitability of banks is under tremendous pressure because of continuous shrinking of spread. It becomes important for banks to reduce the cost per transaction for increasing spread that in turns will increase the profitability of banks. Use of technology in banks reduces the cost. Banks have realized that cost of transaction drastically reduces from brick and mortar structure of the branch to online delivery channels like ATM, POS Terminal, Mobile Phone, Internet, etc. Each of these channels has its own specific advantages in terms of improved customer service and reduced transaction cost. The basic difference between online banking and traditional banking is that, in traditional banking the customer has to visit the branch for the basic banking needs viz. withdrawal or deposit of cash, transfer of funds, statement of accounts etc. Online-business saves customers’ time. Bank also enjoys lower overheads, establish¬ment, premises and maintenance costs, which results in reduction of transaction cost. Low transaction cost is one of the main reasons why online business is getting popularity. Worldwide transaction cost of ADCs are decreasing as number of online (branch less) transactions are increasing very rapidly.

Average Transaction Cost (in USD)

Source: Javelin Strategy and Research

ICT Infrastructure of Banks

Banking sector of Bangladesh consists of six state-owned commercial banks (SOCBs), thirty nine private commercial banks (PCBs), nine foreign banks (FBs), two specialized banks (SBs), and four non-scheduled banks. At the end of 2015, the nationwide outreach of scheduled banks is limited to 9,271 branches. With the pace of time banks are brought under online operations and Alternative Deliver Channels (ADCs) are also introduced.

ADCs at the end of 2015

According to the Bangladesh Bank (BB) guideline, commercial banks are categorized as Category-1 and Category-2. Category-1 means Centralized ICT Operation for managing core business application solution through Data Center (DC) with backup assets for continuation of critical services including Disaster Recovery Site (DRS)/Secondary Data Center to which all other offices, branches and booths are connected through WAN with 24/7 attended operation. Category-2 means Decentralized ICT operation for managing distributed business application solution hosted at DC or operational offices/branches with backup assets for continuation of critical services connected through WAN or having standalone operations. It is seen that at the end of 2015 around 88 per cent banks have introduced real time online banking, meeting the Category-1 architecture. The rest of the banks have introduced either Category-2 (5%) or Mixed Category (7%) architecture. Banks of Mixed Category partially implemented Category-1 architecture and gradually transferring the branches to meet the Category-1 architecture from Category-2 architecture. SOCBs and SBs mainly fall in this category.

Economic Trend, (January 2016), BB  

  

Source: BIBM

Branch Automation

Despite the fact that the SOCBs are large in terms of shares in assets and number of branches, they could cover only around 72.3 per cent of their branches under computerization by 2015 while the PCBs and FCBs brought 99.5 and 100 per cent of their branches, respectively, under computerization. The following graph shows computerization status of bank branches during 1998-2015 in Bangladesh. We see that, total computerization of bank branches for all banks in 2015 stood at 75.1% due to the growth of computerization of govt. banks in last few years.

IT Investment and Sector-wise IT Budget

In tune with the global trends, Bangladeshi banks have been investing heavily in technology infrastructure, solutions and manpower. Possibly, the key purpose of such high investments in IT is to achieve increased productivity, efficiency, profitability and competitive advantage through improved internal and external transaction flow, better access to clients and markets and enhanced reach and quality of products and services. Total investment for IT operations in the banking sector up to 2015 was estimated at Tk. 25,007 crore since 1968 (considering the installation of computer at Agrani Bank in 1968 which was the first installation of computer in the banking sector of Bangladesh). And in 2015, approximately Tk. 1138 crore was invested on IT processes in the banking segment, excluding central bank In 2015, it is seen that a major portion of the IT budget was used to procure hardware and it was 41.9% of total budget. Second highest budget went to software sector. However, budget for security, training and audit was very poor in last five years. The rest of the budget went to power management, vehicles purchase, stationary procurement and decoration purpose.

Distribution of IT Budget from 2011 to 2015 (% of Total Budget)

Source: BIBM

Penetration of Computer (PC) and E-mail ID

Number of computers and official E-mail account per hundred employees are two important parameters to understand the automation status of a bank. At the end of 2015, it is seen that about 86% of the bank employees have working terminal (PCs) whereas approximately 77% of the employees (perhaps most of the non-officers have no e-mail id which is not unusual) have official e-mail addresses. Currently we have about 1.73 lac employees in the banking sector and total number of 1,46,253 PCs and 6700 Servers are being used in this sector.

Corporate Intranet System and Internal Communication

Some of the banks have their in-house developed system having a revolutionary impact in implementing the paper-free communication inside the bank. An internal web portal that holds features like circulars, messaging, news, instant notices, employee profiles, on-line leave processing, on-line requisition, on-line cheque requisition, MIS reports from CBS data and many more. In 2015, approximately 52% banks had this corporate intranet facility which was 20% in 2013. By reducing administrative cost this system will increase the productivity and efficiency of employees of banks. All banks should come forward to get the benefit of this system.

Human Resource in IT Department

Today ‘IT Department’ is the most important department in any bank which was hardly found a decade ago. This departments works like a power-hose of a bank. Most of the IT departments are headed by DMD equivalent executives. Approximately, 3500 IT professionals has been working in those departments. It is found that Average, Minimum and Maximum number of employees of IT department is 65, 15 and 278, respectively in 2015.

Core Banking Software (CBS)

Using the CBS Systems, banks are providing real-time online banking services to its customers. It has also the capability to provide centralized MIS and ad hoc reports. Moreover, it is also helping to ensure seamless flow of information in a secured manner at all levels of the management. In today’s highly volatile and competitive business environment, a centralized robust CBS that can accommodate all the electronic delivery channels is a must for survival in the race of competition. In 2011, 45% banks were using foreign CBS and 32% local CBS. Only 8% banks developed their CBS by their own experts and 18% banks were using a combination of local and foreign CBS. In 2012, we see that 49% and 28% banks used foreign and local CBS, respectively. But in 2013, use of foreign software increased slightly and stood at 53% of total CBS. Clearly, use of foreign software has been increasing over the period 2011-2015 defeating the local software market. Though, in 2015, market share of local software slightly increased compared to 2014, use of in-house software decreased by 2%

Classification of Banking Software (% of Banks)

Application Software

Other than CBS, banks use a large number of application software being developed by its own resources or external vendors such as Reconciliation System, Payroll System, Employees Tax Management System, Foreign Exchange Return Software, Cash Transaction Reporting System etc. for their day to day operations. It is seen that, on an average 23, minimum 6 and maximum 80 application software are being used in banks. Among the software, 55% are developed by the banks themselves, 22% are local and rest of the 23% are foreign software.

Types of Application Software, 2015

Source: BIBM

Data Communication Infrastructure

Reliability of data communication link is a matter of the utmost importance for smooth operation of online banking. Optical fiber transmission system is more reliable compared to other transmission links. A decade ago it was a dream to get an optical fiber connectivity in Bangladesh. But, recent development of the optical-fiber network of the country have brought huge opportunities for banks to run online banking activities easily. Following table shows that banks are now trying to give more priority to use optical fiber link compared to other links to ensure stable online data services. Moreover, around 94% banks use dual links for online branch, ATMs or ADCs.

Use of Communication links in Banking Network

(DC to Branch, ATM, POST, etc. )

Source: BIBM

Internet Banking

Bangladeshi customers are now able to do banking from any place of the globe at any time by using Internet technology. At the end of 2015, about 65% banks were able to provide some sort of Internet banking services in Bangladesh, which was 64% at the end of 2014. In December 2013, it was 61%, showing a 4% growth compared to 2012 (57%). Amount of money transferred by this channel is shown in the following graph.

Internet Banking, 2011-2015 (In Billion taka)

Source: Financial Stability Report (2011-15), Economic Trend, (January 2016), Bangladesh Bank.

ATM  Banking

A the end of 2015 total 8,582 ATMs has been installed in Bangladesh. That shows a moderate increase from previous year (7,331). Most of the ATMs are installed in the divisional cities and district level. Around 49% ATMs are installed in Dhaka. A very few ATMs are being operated in rural areas, less than 4.84%. It is mentionable that 43% ATMs is set up by the DBBL alone. Total number of plastic card (Debit, Credit, Pre-paid) was recorded at 91, 92,640. At the end of 2015, total number of transaction was recorded at 13.49 crore and total volume of ATM transactions was recorded at Tk. 93,910 crore.

Volume of Transactions through ATM, 2011-2015 (In crore Taka)

Source: Financial Stability Report (2011-15), Economic Trend, (January 2016), BB

Point of Sale Terminal (POST)

Besides expanding the ATM networks, the banks are also giving emphasis on increasing their POST network covering the major outlets for ease of purchase for the customers. Many banks have installed POS terminals in major shops, hotels, sale centre, etc., all over the country. POST allows all types of debit card and credit cards for making transactions. In 2011 total number of POST in Bangladesh was 11,852 whereas at the end of 2015, it stood 30,032. In 2015, total number of transaction was recorded at 1.54 crore and volume of transaction was Tk. 16,570 crore. Most of the POSTs are being operated in divisional towns. Dhaka is the city where 82% POST are in operation.

Mobile Financial Services (Mobile Banking)

Mobile banking is a term used for performing banking activities via a mobile device such as a mobile phone. The developments in mobile phone density in Bangladesh, with 132 million subscribers, present a unique opportunity to leverage the mobile platform to meet the objectives and challenges of financial inclusion. MFS started in Bangladesh on 22 September 2011. In the few years since the launch of the MFS, the sector has shown significant growth.

Volume of MFS Transactions and Customers: Apr 2013-Sep 2015

Source: Bangladesh Bank

Banks are already carrying out activities such as disbursement of inward remittances, financial transactions through agent/ bank branch/ ATM/ mobile operator outlet, payments of business organizations (such as utility bills) by individuals, payment of individuals by business organization (such as salary distribution) payment of individuals by Government (such as old-age allowance, freedom fighter allowance, etc.), payments of Government by individuals (such as tax payments), individual to individual transactions (from one registered mobile account to another registered mobile account) and other transactions such as microfinance, overdraft facilities, insurance premiums, etc.

Trends in Mobile Financial Services in Bangladesh

Source: Financial Stability Report (2012-2015), Bangladesh Bank

Abave the table presents the status of mobile banking in Bangladesh. A tremendous growth of the number of agent, client, and volume of transaction has been observed during the period 2012 to 2015.

Agent  Banking

To expand the outreach of financial services to the remote rural areas and marginalized populations, BB has taken initiatives in agent banking. Regulations and guidelines for agent banking operations were issued on 9 December 2013. Agent Banking (AB) means providing limited scale banking and financial services to the underserved population through engaging agents under a valid agency agreement, rather than a teller/ cashier. It is the owner of an outlet who conducts banking transactions on behalf of a bank. Collection of small value cash deposits and cash withdrawals (ceiling should be determined by BB from time to time), Inward foreign remittance disbursement, Facilitating small value loan disbursement and recovery of loans, Facilitating utility bill payment, Cash payment under social safety net programme of the Government, Facilitating fund transfer (ceiling should be determined by BB from time to time), Balance inquiry, Collection and processing of forms/documents in relation to account opening, loan application, credit and debit card application from public, Post sanction monitoring of loans and advances and follow up of loan recovery, Receiving of clearing cheque, other functions like collection of insurance premium including micro‐ insurance etc. Six banks have been licensed so far for starting agent banking services. They have already started appointing agents, and 194 agents’ outlets are in operation now. At the end of 2015, total number of subscribers was 77,437 whereas total volume of transaction was recorded at Tk. 2640 crore.

Bangladesh Automated Clearing House (BACH)

The Bangladesh Automated Clearing House (BACH) started automated cheque clearing from 07 October 2010 by replacing the ancient manual clearing system with automation, which allows inter-bank cheques and similar type instruments to be settled instantly. As member of Bangladesh Automated Clearing House (BACH), all the banks have responded proactively by expanding its BACH operation facility to all regions where Bangladesh Bank has its branch and all areas where the clearing operation was done by Sonali Bank on behalf of Bangladesh Bank. As such, ACHS has ensured quick clearing of customers’ financial instruments. The banks have also increased the number of cheque scanning points to alleviate the task of scanning at one point. It is helping the banks to clear the financial instruments efficiently within a very short time. Gradually the banks are expanding this facility under the guidance of Bangladesh Bank to all the regions of Bangladesh so that all the branches of all banks in our country can come under a single clearing house being operated in Dhaka.

Clearing through BACH, 2010-2015

Source: Financial Stability Report (2010-2015), BB

Bangladesh Electronic Funds Transfer Network (BEFTN)

The commencement of the Bangladesh Electronic Funds Transfer Network (BEFTN) added a new milestone in the country’s payment and settlement system. BEFTN is the paperless electronic exchange that ensures transfer of funds from one account to another, either within a single institution or across multiple institutions through computer-based systems. After a successful pilot implementation of BACPS, BEFTN started its live journey on February 28, 2011. BEFTN drives the payment mechanism towards a green and almost risk-free dimension. It accommodates both credit and debit transactions. The impact of credit or debit entries on receivers’ account can easily be recognized form BEFTN. Government entities are the largest stakeholders of BEFTN for disbursing staff salaries, benefits, vendor payments, etc. In addition, salary disbursements, business payments, dividend and refund warrant payments, insurance premiums and installment payments of the private sector, and also foreign remittance disbursements are being facilitated by BEFTN. In 2014, on average, 27,988 transactions were settled per day, which is 33 percent higher than that of 2013. Total monetary amount of such transactions was 598 billion BDT, which is 51percent higher than that of the previous year. In 2015, total number of transactions was recorded at 1.32 crore having a volume of Tk. 87.38 thousand crore.

RTGS

Bangladesh Bank is committed to provide a safe, efficient, inclusive and authorized payment and settlement system for the country. The introduction of the Real Time Gross Settlement (RTGS) system is another milestone of the country’s financial sector development. RTGS is a central processing and settlement facility system which was launched on 29th October 2015. It settles money or securities in which both processing and final settlement of funds transfer can take place with immediate effect (i.e., in real time and gross in amount). From 29 October 2015 to 31 December 2015, it settled approximately 8,820 transactions amounting Tk. 1,387.8 billion (Financial Stability Report, 2015, BB).

Online MIS in Banks

A separate MIS department can ensure precise, timely and accurate generation of MIS report. Generation of MIS report from various departments and sending it to the management at right time is a challenging job. For this reason, a separate MIS department gives benefit to an organization especially if the organization is very large. At the end of 2015, 60% banks have established separate MIS departments having average, minimum and maximum no. of employees 13, 02 and 34, respectively. But among the banks, only 15% banks have separate Business Intelligence Software (BIS) for the generation of MIS report.

Call Center

Giving importance to customer satisfaction and easy access to banking services, 48% banks have established its high tech contact Centre. IVR, integrated with CBS and Card system that enables customers to do banking by any phone system as well as consultation with Call Centre agents (Phone banker). The minimum, average and maximum number of employees engaged in call centers is 5, 36 and 130 respectively. Near about 1200 employees are working there.

Trends in Technology Adoption

The flolowing Figure shows the trend in technology adoption in the country’s banking sector over the period 1998 to 2015. It is evident from the graph that, out of different innovative technology driven products and services, significant response among the banks is observed in adopting ATM, online, call center, mobile banking and SWIFT during the period 1998-2015.

Trends in Technology Adoption, 1998-2015

Source: BIBM

Impact of ADCs on Financial Inclusion (FI)

Financial Inclusion means Access and Availability of Finance with an Affordable Cost. In Bangladesh, The traditional approach of FI was limited to expansion of branches of commercial banks. New technologies, like mobile phone, came up with huge opportunities for branchless banking covering the whole country and bypassing the digital divide between urban and rural people. Different research show that FI through technological approach reduced the distance of financial access point, cost to travel to an access point and travel time to nearest access point. Development of communication technology is a blessing for financial inclusion. Availing the opportunity of modern technology, financial inclusion process may be expedited. Internet banking, online banking, mobile banking, agent banking etc. are playing a very vibrant role for covering more people in the banking services. In order to provide banking service at lower cost and at shorter time to remote area, Banks have adopted various modern technology viz. installation of ATM, POS, introducing credit card and debit card, uses of mobile phone, internet banking, on line banking and tele-banking. It is observed that mobile banking is the potent instrument for increasing outreach and mobile phone is an ideal platform to increase of outreach of financial services to the rural population as their penetration is already large and growing. A trend in technology adoption is shown in the following figure.

Trends in Technology Adoption: 2010-2015

Source: BB

Geographical penetration indicates that the number of bank branch per 1000 square kilometer increased from 44.24 in 2005 to 61.21 in 2014. The number of ATM booths per 1000 square kilometer has increased tremendously from 0.82 in 2005 to 43.27 in 2014 (Figure *). As number of branches of Micro Finance Institutes (MFIs) is larger than bank branches their penetration is higher than banks but it is decreasing over the period of time. Incase of MFS agent per 1000 square kilometer the growth is tremendous. Within four years, starting from 2011, it crossed the geographical penetration of banks, MFIs and ATMs.

Geographic Penetration of Banking Services

Source: Bangladesh Bank

In term of demographic penetration, the number of branches per 100,000 population increased from 4.67 in 2005 to 5.64 in 2014. The number of ATMs per 100,000 population increased from 0.13 in 2005 to 3.99 in 2014 (Figure *). Population penetration by NGO-MFIs indicates that 9.61 branches existed per 100,000 population at end-June 2007, decreasing marginally to 9.46 branches at end-June 2013. Incase of MFS agent per 100000 adult people the growth is very high. Starting from 2011, within four years, it crossed the demographic penetration of banks, MFIs and ATMs.

Demographic Penetration of Banking Services

Source: Bangladesh Bank

Index of Financial Inclusion (IFI) is a commonly used index in home and abroad to measure the overall financial inclusion of a country. In the figure IFI1 measures the value of the index if we consider the bank branch only. IFI2 indicates the contribution of branches and ADCs. IFI3 shows the values of index when MFIs and branches are considered.

From the comparison, it is expected that financial inclusion process will be expedited by the successful expansion of ADCs (ATMs, MFSs, agent banking, IB) in Bangladesh. It has been found that these are less costly but more effective tools of FI. Similarly, MFIs are also playing crucial role in this process.

Comparative Value of Indexes for last five years (%)

Source: BIBM

Challenges and Recommendations

ICT Infrastructure: In different studies it is found that lack of long term vision, proper planning and initiatives; shortage of manpower, poor IT budget, weakness of business process reengineering, delay in procurement process and lack of advanced training are the main problems for the development of the state-of-the art ICT infrastructure of the banks. To overcome these problems, every bank should have an ICT budget of certain portion of their annual profit. This budget may be spent for ICT infrastructure development and manpower training. IT Professionals can be recruited to fill up the gap between actual demand and existing manpower. Leadership quality and efficiency of IT project implementation team should be developed for successful design and implementation of banking automation projects.

Skills Development: Bank management should increase their level of understanding and appreciation that there is no alternative to develop IT skill in banks because ICT is rapidly changing platform and more diversified and sophisticated Cyber attacks/frauds are also increasing. There is no alternative to develop ICT skill (especially on IT Governance, IT Project Management, IT Audit, IT Risk Management and IT/Cyber Security) with a view to maintain e-banking system with reliability and security.

Security: The security of the information flow both inside and outside of the bank should be focused. It is the security issue that must be addressed properly with adequate hardware, software and manpower. Every bank should strengthen its ICT security department in ICT division. Recruitment of ethical hacker; placing a proper IT security control and monitoring system etc., are the crying need of banks. Security awareness of both bank customers and employees’ is a great concern for banking sector. It is seen over the years that online banking frauds have been increasing due to the lacking of proper knowledge regarding banking information security. Customers’ awareness can be increased by counseling, advertising and distributing leaflets/brochures. Multi-factor/adaptive authentication method can be introduced by banks quickly. Data theft and leakage can be stopped by increasing morality/ethics of bank employees and increasing internal data security.

IT Governance: Implementation status of ITG in banks is not very good yet. Banks should give proper attention to follow appropriate guidelines, standards and framework such as COBIT, ISO/IEC 38500:2008, ITIL, COSO etc. for successfully implementing ITG. An IT roadmap is the governing document that dictates specifically how technology will support the business strategy and drive businesses priorities over the next 3-5 years. A technology roadmap can help the CIO to act more in line with the business strategy of the organization.

IT Audit: Every year, ICT infrastructure of each bank should be audited by qualified IT auditors. It is clear that poor auditing system of banks may create another risk for security if auditors fail to identify security holes. Banks should not compromise on this issue. Insufficient IT Auditors could be one of the IT risk factors. A shortage of sufficient IT Auditor is also a serious issue and need to be addressed as soon as possible. They must be internationally certified having inadequate training and sufficient experience. IT Auditors without relevant banking knowledge is also an issue. Bank management should give special attention to this issue.

Corporate Intranet System: An internal web portal holds different features like circulars, messaging, news, instant notices, employee profiles, on-line leave processing, on-line requisition, on-line cheque requisition, MIS reports from CBS data and many more. With a view to increase productivity of bank’s employees and reduce administrative cost, banks should take immediate steps to develop effective Corporate Intranet System.

Management Information System: A good quality MIS report is the main instrument that helps monitoring and decision making process. Proper method of MIS report generation can play an important role to prepare MIS report in time as per management demand. Banks may develop Data Warehouse in order to produce MIS report from various data sources and in various formats with trend analysis. The banks especially the larger banks may use Data Warehousing along with BI software tools to generate ad-hoc reports of online MIS, DSS and EIS.

Role of Bangladesh Bank: BB has been working with a great care for a long period to develop the overall IT infrastructure of banking sector. Proper guidelines and monitoring of central bank is also helping the IT department of different banks to expand in right way. As a result expectation from BB is increasing day by day. Bangla desh Bank may take initiatives to develop an Information Sharing and Analysis Centers (ISAC) where all the members can discuss and share their opinion regarding the various IT audit and IT security issues to mitigate the risks and aware about the latest security threats. Moreover, Bangladesh Bank can play a vital role in setting up a cell/wing including a Data Bank for all of the commercial banks. That will help to collect and share up-to-date information regarding current status, growth and problems of the online banking of Bangladesh. IT Heads of 93% banks agreed that banking sector should have a center for sharing electronic banking experiences, problems and solutions. Bangladesh Bank may take initiatives in this regard. An institution like IDRBT (Institute for Development and Research in Banking Technology) which is set up by the Reserve Bank of India can be formed immediately in Bangladesh. Moreover, a Computer Emergency Readiness Team may be formed for disaster recovery of the banking sector.

Conclusion

Information Technology, a revolutionary force has not left the banking sector untouched. The business operations in the banking and financial sector have been increasingly dependent on the computerized information systems over the years. It has now become impossible to separate Information Technology (IT) from the business of the banks and the financial institutions. In last 15 years a tremendous growth is seen in the digitization of the banking sector of Bangladesh. Government initiatives to develop a ‘Digital Bangladesh’ also boosted up this process highly. A recent study of BIBM shows that investment on IT have raised efficiency of banks over time in Bangladesh regardless of their ownership. These gains in efficiency have also improved bank’s productivity and profitability. Still, efficiency and profitability of state-owned and nationalized banks are less compared to other groups. As many financial products and services directly or indirectly depend on ICT, banks have to think how to involve IT to minimize the cost, increase the efficiency and how to provide better services to the customers ensuring reliability, safety and security. There are several basic requirements for ICT which must be met; these include a sound technical infrastructure, efficiency of the employees, and interaction with technical developments. Moreover, IT security and governance must be ensured for next generation online banking in Bangladesh.

2 thoughts on “The Digital Banking Revolution in Bangladesh

  1. This is a very informative overview. It will be more convenient if it will update year to year. We are thank full to the writer for provide this report. I have learn lot from this article.

  2. Digital fintech technology now most commonly used terms and requires to have updated informative write up like this.

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