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Banks urged to practice centralized, decentralized methods in decision making

  • Published at 10:17 pm November 25th, 2018
Top bankers and experts speak at a seminar on “Centralized and Decentralized Banking: A Study of Risk-Return Pro le of Banks” held at the Bangladesh Institute of Bank Management (BIBM) auditorium in the capital on November 25, 2018 COURTESY

BIBM associate professor Mohammed Sohail Mustafa & his team presented the research paper on the topic at the seminar

Speakers at a seminar on Sunday, on decision making processes in banking activities, said both centralization and decentralization should be in place to run a bank efficiently and to cater to clients most professionally.

The seminar on “Centralized and Decentralized Banking: A Study of Risk-Return Profile of Banks” was held in the capital at the Bangladesh Institute of Bank Management (BIBM) auditorium.

Organized by the BIBM, Bangladesh Bank’s (BB) Banking Reforms Adviser and Former Deputy Governor, Shitangshu Kumar Sur Chowdhury, was the chief guest at the seminar chaired by Director General of BIBM, Dr Toufic Ahmad Choudhury. 

BIBM associate professor Mohammed Sohail Mustafa & his team presented the research paper on the topic at the seminar.

The paper advocated a decentralized banking sector.

“A 66.35% objection to a decentralized system was actually the reason behind why banks switched from a decentralized to a centralized system,” said the paper.

“The main objective of this transformation was to reduce or eliminate corruption, embezzlement, fraud, and malpractices of bank officials at the branch level by inappropriately using their empowerment and authority.”

Banking Reforms Adviser of BB said the country’s banking sector is run by bank systems where the decision making is either centralized or decentralized. 

He said that during the late 80’s in Bangladesh, a trend was observed that the banking system was moving from centralization to decentralization following the entry of multi-national banks in the economy following the global trend. 

“Within a decade, we found that these banks reinstated their previous system due to lack of knowledge and the abuse of power and malpractice of bank officials at the branch level, when it came to giving loans,” he added. 

Former Deputy Governor of BB said that currently the majority of loan proposals are customarily approved by bank head offices. Most large loans are approved from head offices and small-medium sized loans are approved at local and regional branches. 

Therefore, both types of transformation have been experienced in the banking industry, centralization to decentralization, as well as, decentralization to centralization. 

Shitangshu Kumar Sur Chowdhury said: “Banking cost control efficiency and higher profitability may be ensured with less manpower in a centralized system since major decisions are taken at the top level.”

On the other hand, the fastest credit decisions can be madee in a decentralized system due to the scope for avoiding a long and bureaucratic chain of command. Customer satisfaction level is high in a decentralized system since it saves time for both bank and customer.” 

Furthermore, the paper said the Return on Assets (ROA) and its standard deviation were negatively affected by centralization before and after the ‘80s. 

“When we compare both periods, we find that during the composition period the more the banks diversified geographically the higher their returns and the lower their volatility. As for the solvency ratio, we find that more diversified banks showed lower leverage ratios before the decentralization, but not afterwards,” reads the paper.

“When we compare both periods, we find that during the composition the higher the banks diversified geographically, the higher their capital ratio. Therefore the estimated effects in relation to the decentralization period are pointing in the same direction: more decentralization has positive effects on resilience,” the paper added.

Managing Director and Chief Executive Officer (CEO) of Dutch-Bangla Bank Ltd, Abul Kashem Md Shirin, said centralization or decentralization should be based on the type and service of the bank. 

Country Chief Executive Officer of Standard Chartered Bank, Naser Ezaz Bijoy, said: “100 % centralization or decentralization cannot be implemented at any bank. Standard Chartered Bank is providing services to its customers by following both methods.”

Supernumerary Professor of BIBM, MD Yasin Ali, said decentralization of some services will improve the quality of banking services. But the initiative should be implemented duly considering the potential risks and effects. 

BIBM Supernumerary professor Helal Ahmed Chowdhury said both methods of centralization and decentralization in the banking sector should be kept. But there must be increased monitoring so customers get all kinds of services quickly.

Dr Muzaffer Ahmed Chair professor of BIBM, Barkat-e-Khuda, ph.D, Former A.K Gangopadhaya Chair Professor of BIBM, SA Chowdhury, and BIBM Professor and Director, Dr Prashanta Kumar Banerjee were present at the seminar.

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