An overwhelming majority of the country's banks are leaning towards centralisation of their operations, although most of the customers prefer a decentralised system, an industry-wide survey has found.
Reduction or elimination of corruption, fraud and malpractices at the branch level were the main reasons, for which the banks previously preferred to centralise their system, according to the study.
These were among the findings of a four-member group research, conducted by Bangladesh Institute of Bank Management (BIBM) on 47 scheduled banks of the country.
"Back in the late '80s, banking system in Bangladesh was transforming from centralisation to decentralisation by following the then global trend," said Mohammed Sohail Mustafa, Associate Professor of BIBM.
"The main objective of the transformation was to reduce or eliminate corruption, embezzlement, fraud and malpractices of bank officials at the branch level."
"But within a decade, the banks reinstated their previous centralised system due to the abuse of power and various malpractices of the bank officials at the branch level," he noted.
"The same trend has been echoed in our survey, and around two-third or 66.35 per cent of the respondents were found against decentralised system."
However, a deeper look at the survey revealed that decentralised banking system has its benefits also. For example, that the customer satisfaction level of a bank tends to be quite high in a decentralised system, the survey showed.
At the same time, faster credit decisions can be taken in a decentralised system, as the branch officials can easily avoid long and bureaucratic chain of command.
Similarly, business expansion also becomes easier and speedier in decentralised system, the BIBM researchers found.
"Again, our research also showed that a bank's control efficiency is higher in a centralized system, while higher profitability can also be ensured in the system," Mr. Mustafa said.
"At the same time, less manpower is required in a centralised system since major decisions can be taken at the top level," he added.
Meanwhile, the BIBM research also found that the amounts of loan recovery and non-performing loan (NPL) are almost equal in both systems.
Focusing on the findings of the study, experts at the seminar called for adopting a mixture of centralised and decentralised systems in banking institutions.
"It is evident that business cycle synchronisation between centralisation and decentralisation, in which a bank operates, has a negative impact on its risk," said Banking Reforms Adviser of Bangladesh Bank (BB) Shitangshu Kumar Sur Chowdhury.
"The more synchronised the two systems are, the lower the benefits of decentralisation."
"The centralised and decentralised banks mitigate the negative effect of synchronisation and reinforce the positive effect of diversification on their resilience," opined the former BB Deputy Governor.
Chief Executive Officer (CEO) of Standard Chartered Bank Bangladesh Naser Ezaz Bijoy said, "At this point of time, origination coverage of the banks should be more decentralised, while processing should be more centralised."
"However, as digitalisation enhances, banks need to move from decentralisation to centralisation," he added.
"The decision regarding centralisation and decentralisation depends on the size of a bank, the areas it covers, and its range of activities," said Abul Kashem Md. Shirin, Managing Director (MD) and CEO of Dutch-Bangla Bank Limited.
"The best way is to adopt a mixture of centralised and decentralised systems."
"For example, in case of loan procurement, retail and SME (small and medium enterprise) loans should be decentralised, while large loans should be procured centrally," he added.
"We need to adopt a mixture of both. Decentralised system is especially relevant when we need to focus on financial inclusion or reaching the grassroots," said S A Chowdhury, former professor of BIBM.
Supernumerary Professor of BIBM Helal Ahmed Chowdhury in his speech said since a major portion of bank branches across the country are yet to be fully digitalised, it is better to maintain a decentralised system up to a certain extent for now.
"However, the monitoring of loans should be done centrally. This is especially true when it comes to big loans," he added.
"Monitoring remains the major weak link in sectors across Bangladesh, and it is especially true for the public sector," said Barkat-e-Khuda, BIBM's Dr. Muzaffer Ahmad Chair Professor.
During the seminar, another research paper on "Government Spending and Socio-economic Development in Namibia" was also delivered.
Christopher P P Shafuda, a PhD candidate from North-Eastern Hill University of Shillong, India presented the paper.
