ConsumerCreditMarketingSysteminBangladesh: ACaseStudyonDhakaBankLtd.

ByAliHaiderMohammadullah

1. Introduction

A commercial bank provides financial services, including debit or credit cards, receiving depositsofmoney,lendingmoneyandprocessingtransactions.Acommercialbankaccepts deposits from customers and in turn makes loans based on those deposits. Some banks (calledBanksofissue)issuebanknotesaslegaltender.Manybanksofferancillaryfinancial servicestomakeadditionalprofit;forexample,mostbanksalsorentsafedepositboxesin theirbranches.Theprimarypurposeofabankwastoprovideloanstotradingcompanies. Banks provide funds to allow businesses to purchase inventory, and collected those funds backwithinterestwhenthegoodsweresold.Forcenturies,thebankingindustryonlydealt with businesses, not consumers. Commercial lending today is a very intense activity, with bankscarefullyanalyzingthefinancialconditionofitsbusinessclientstodeterminethelevel ofriskineachloantransaction.Bankingserviceshaveexpandedtoincludeservicesdirected at individuals andrisks in these much smaller transactionsare pooled.In the recent time, commercial banks are more concerned about the consumer credit. They provide various typesofcredittotheconsumertofulfilltheirpersonalneeds.Thisisveryimportantfora countrytodevelopthelifestandardofpeople.Consumercreditisthebestwaytodevelop thelivingstandard. Inthisassignmentwetrytodiscussaboutconsumercreditmarketingsystemandthatswhy we have done a survey. With the basis of survey we prepared our finding part and try to cleartheconsumercreditborrowersview.Wealsotrytodiscussaboutroleofbank,roleof creditandroleofconsumercreditinBangladesheconomy. 1.1 RoleofBankinBangladeshEconomy Bangladesh pursues a liberal market economy. Bangladesh Bank is the apex bank of the countryresponsibleforpromotinghealthygrowthanddevelopmentofthebankingsystem. Banksandinsurancecompanies,bothintheprivateandpublicsectors,areoperatingfreely and contributing to the economy. Foreign banks like American Express Bank, Standard Chartered Bank, Grindlays Bank, Indosuez Bank, etc. function in Bangladesh through their branches. ThereareotherspecializedfinancialinstitutionsliketheBangladeshShilpaBank(Industrial Bank), Bangladesh Shilpa Rin Sangstha (Industrial credit organization), Krishi (Agriculture) Bank, House Building Finance Corporation, Grameen (Rural) Bank and several cooperative banks. The Industrial Promotion and Development Corporation (IPDC) of Bangladesh and the Investment Corporation of Bangladesh (ICB) provide equity support to public limited companies in the private sector. The government has recently replaced the Controller of Capital Issues by establishing a full fledged Securities and Exchange Commission with enhancedpowerforthegrowthanddevelopmentoftheSecuritiesmarketinBangladesh. Liberalfiscalpolicyhasresultedinthehighestforexreserve.
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Duringthelastthreeyearsanumberofstepshavebeentakentostrengthenthecountry's bankingsystem.Theseincludeimprovementoftheregulatoryenvironment.Enforcementof loan classification guidelines and recapitalization of nationalized commercial banks. Over thepasttwoyears,therehasbeenamassiveinfusionoftaka32,000millionintheNCBsin theshapeofgovernmentbondstomakeupforcapitalandprovisioningshortfalls.(Bashar) The countrys economic performance in the four quarter (AprilJune of FY06) indicated a marginally slower growth in Gross Domestic Product (GDP) compared to the encouraging GDP growth and control on inflation in the third quarter of the fiscal year 200607. The major growth area was industry, particularly manufacturing and construction, which recorded notable expansion in the quarter under review. The performance of the agriculturesectorwasrelativelyweakercomparedtothatofthepreviousyear. Afavorableaspectofthecountrysmacroeconomyduringthereviewperiodwasthereturn of stability in the foreign exchange market, and an improvement in the countrys foreign exchange reserve. Increased inflows of remittances and better performance of the export sectortogetherhelpedraiseBangladeshBanksforeignexchangereservebyUS$430million inthereviewquartertoUS$3,340millionatendJune2006comparedtoadeclineofUS$10 million in the corresponding quarter of the last year. The generally stable domestic and external macro economic environment benefited all the real sectors of the economy. In particular, the industry sector benefited from increased investment and the creation of additional production capacity in textile and leather subsectors, which boosted manufacturingproductioninthequarterunderreview. Inthemonetarysector,theCentralBankcontinueditsrestrictivemonetarypolicystanceby increasinginterestratesinthereviewquarter.WhiletheCentralBankpursuedarestrictive monetary policy, reserve money growth in Q4 of F06 was unusually high, at 19.8% comparedto9.7%inthelastfiscalyear.Thisresultedinalargervolumeofcurrencyissue thananticipated.(DhakaBank,2006) 1.2 RoleofCreditinBangladeshEconomy The new banking system succeeded in establishing reasonably efficient procedures for managing credit and foreign exchange. The primary function of the credit system throughoutthe1970swastofinancetradeandthepublicsector,whichtogetherabsorbed 75percentoftotaladvances. The government's encouragement during the late 1970s and early 1980s of agricultural development and private industry brought changes in lending strategies. Managed by the BangladeshKrishiBank,aspecializedagriculturalbankinginstitution,lendingtofarmersand fishermen dramatically expanded. The number of rural bank branches doubled between 1977and1985,tomorethan3,330.Denationalizationandprivateindustrialgrowthledthe Bangladesh Bank and the World Bank to focus their lending on the emerging private manufacturing sector. Scheduled bank advances to private agriculture, as a percentage of sectoralGDP,rosefrom2percentinFY1979to11percentinFY1987,whileadvancesto privatemanufacturingrosefrom13percentto53percent.

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Thetransformationoffinanceprioritieshasbroughtwithitproblemsinadministration.No sound projectappraisal system was in place to identify viable borrowers and projects. Lendinginstitutionsdidnothaveadequateautonomytochooseborrowersandprojectsand wereofteninstructedbythepoliticalauthorities.Inaddition,theincentivesystemforthe banks stressed disbursements rather than recoveries, and the accounting and debt collectionsystemswereinadequatetodealwiththeproblemsofloanrecovery.Itbecame more common for borrowers to default on loans than to repay them; the lending system was simply disbursing grant assistance to private individuals who qualified for loans more forpoliticalthanforeconomicreasons.Therateofrecoveryonagriculturalloanswasonly 27percentinFY1986,andtherateonindustrialloanswasevenworse.Asaresultofthis poorshowing,majordonorsappliedpressuretoinducethegovernmentandbankstotake firmer action to strengthen internal bank management and credit discipline. As a consequence, recovery rates began to improve in 1987. The National Commission on Money,Credit,andBankingrecommendedbroadstructuralchangesinBangladesh'ssystem of financial intermediation early in 1987, many of which were built into a threeyear compensatoryfinancingfacilitysignedbyBangladeshwiththeIMFinFebruary1987. OnemajorexceptiontothemanagementproblemsofBangladeshibankswastheGrameen Bank, begun as a government project in 1976 and established in 1983 as an independent bank. In the late 1980s, the bank continued to provide financial resources to the poor on reasonabletermsandtogenerateproductiveselfemploymentwithoutexternalassistance. Its customers were landless persons who took small loans for all types of economic activities, including housing. About 70 percent of the borrowers were women, who were otherwise not much represented in institutional finance. Collective rural enterprises also couldborrowfromtheGrameenBankforinvestmentsintubewells,riceandoilmills,and power looms and for leasing land for joint cultivation. The average loan by the Grameen Bank in themid1980s was around Tk2,000 (US$65), and the maximum was justTk18,000 (for construction of a tinroof house). Repayment terms were 4 percent for rural housing and8.5percentfornormallendingoperations. 1.3 RoleofConsumerCreditinBangladeshEconomy Commercialbanksplayanimportantroleinthefinancialsystemandtheeconomy.Asakey component of the financial system, banks allocate funds from savers to borrowers in an efficient manner. They provide specialized financial services, which reduce the cost of obtaining information about both savings and borrowing opportunities. These financial services help to make the overall economy more efficient. One of the important financial servicesisconsumercredit. In recent years, there has been a rapid increase in consumer credit. At the same time, despite high average annual growth rates in this segment for the past three years, the marketissettoexpandfurther.Inourcountry,commercialbanksintroducemanytypesof consumercredit,like,houseloan,carloan,personalloan,educationloan,teacherloan,any purposeloan,marriageloan,vacationloanetc.

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1.4 HistoryoftheBank Bangladesh economy has been experiencing a rapid growth since the '90s. Industrial and agricultural development, international trade, inflow of expatriate Bangladeshi workers' remittance, local and foreign investments in construction, communication, power, food processing and service enterprises ushered in an era of economic activities. Urbanization and lifestyle changes concurrent with the economic development created a demand for banking products and services to support the new initiatives as well as to channelize consumerinvestmentsinaprofitablemanner.Agroupofhighlyacclaimedbusinessmenof the country grouped together to responded to this need and established Dhaka Bank Limitedintheyear1995. TheBankwasincorporatedasapubliclimitedcompanyundertheCompaniesAct.1994.The Bank started its commercial operation on July 05, 1995 with an authorized capital of Tk. 1,000millionandpaidupcapitalofTk.100million.ThepaidupcapitaloftheBankstoodat Tk1,289,501,900asonJune30,2006.Thetotalequity(capitalandreserves)oftheBankas onJune30,2006stoodatTk2,188,529,224. TheBankhas37branchesacrossthecountryandawidenetworkofcorrespondentsallover theworld.TheBankhasplanstoopenmorebranchesinthecurrentfiscalyeartoexpand thenetwork. The Bank offers the full range of banking and investment services for personal and corporate customers, backed by the latest technology and a team of highly motivated officersandstaff. In our effort to provide Excellence in Banking services, the Bank has launched Online Banking service, joined a countrywide shared ATM network and has introduced a co brandedcreditcard.Aprocessisalsounderwaytoprovideebusinessfacilitytothebank's clientelethroughOnlineandHomebankingsolutions. Dhaka Bank Ltd. is the preferred choice in banking for friendly and personalized services, cutting edge technology, tailored solutions for business needs, global reach in trade and commerceandhighyieldoninvestments.(DhakaBank,2006) The main activity of the Bank is banking related business. The activity includes deposit collection, extending credit facilities to different corporate organizations and small & mediumenterprises.TheBankissueATMCardstotheaccountholdersanditissuesCredit cardstothecustomersthroughitsPersonalBankingwing.Moreover,ithasdifferenttypes ofloanproductssuchasPersonalLoans,CarLoans,AnyPurposeLoan,VacationLoansetc. Being the member of Dhaka and Chittagong Stock Exchanges Dhaka Bank helps people to perform share trading. The accountholders of the bank can enjoy the SMS banking and Internetbankingfacilities,whichisapartofmoderntechnology. Besides conventional banking Dhaka Bank Limited offers Shariahbased Islamic Banking Servicestoitsclients.TheBankopeneditsfirstIslamicBankingBranchonJuly02,2003at Motijheel Commercial Area, Dhaka. The second Islamic Banking Branch of the Bank

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commenceditsoperationatAgrabadCommercialAre,ChittagongonMay22,2004.Dhaka BankLimitedisaproviderofonlinebankingservicesandanyofitsclientsmayavailIslamic BankingLimitedservicesthroughanyofitsbranchesacrossthecountry.(DhakaBankLtd.)

2 ObjectiveoftheResearch
2.1 2.2 2.3 Tounderstandhowtopreparearesearchwork Tounderstandconsumercredit Tounderstandconsumercreditmarketingsystem

3 LiteratureReview
3.1 Nonprofit credit counseling organizations have been helping consumers manage debtformorethan50years.Creditcounselingconcernsaboutconflictsofinterest and the emergence of a new type of credit counseling agency have triggered significantlegislativeandregulatoryactivity.Theoldercounselingorganizationsrely primarilyoncreditfactorsfortheirrevenues,andthismaycreatetheappearanceof aconflictofinterest.Theseconcernsandothershavetriggeredsignificantlegislative and regulatory activity. The credit counseling industry is an important one, but its activitiesandeffectsarenotwidelyunderstood.Stilltheavailableresearchdoesgive us some insight into the effects of consumer credit counseling and debt managementplansonborrowerbehaviorandtheimplicationsfortheindustryand regulation.(Hunt,2005) Byusingconsumertestingsystematically,theFederalReserveistakinganinnovative approach to revising its regulations and improving the effectiveness of disclosures. Consumers who do not have accurate information and an understanding of what thatinformationmeanswillhavedifficultychoosingamongcompetingproductsand making decisions that are in their best interest. We are finding about consumers, how they use information and how we can simplify disclosures and enhance consumers understanding. Betterinformed consumers will strengthen market competition. Consumer testing for credit cards will also help us improve mortgage disclosuresandcontributetoamorerobust,competitive,andresponsiblesubprime market.(Kroszner,2007) Ascreditmanagementprofessionalseverybodyhaveaclearresponsibilitytoidentify andreportfraudstothepolice.Ifwealltreatfraudmoreseriously,thelossesneed notcontinuerising.Therearealsodirectbenefitstothebusinesseswerepresent.In credit,collections,riskmanagementandnowfraudprevention,mainthingisthatit is much less costly and less effort to prevent a fraud than to attempt to collect a difficultdebtoradebtthathasarisenasaresultofdeception.(Hurst,2003) Little is known about TANF recipients and leavers use of consumer credit. TANF familiesare70% lesslikelythanotherlowincomefamiliestohavea bankaccount andmuchmorelikelytohaveparticipatedinacreditcounselingprogram.Racealso

3.2

3.3

3.4

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matters when it comes to accessing mainstream banking and credit systems. Targeted programs help TANF families gain greater access to the financial mainstream.Whenitcomestospecializationprograms,however,thoseinvolvedin the welfare system are not very different from other poor families. However, by virtueoftheirformalinvolvementwithTANF,thispopulationcanbemoreefficiently servedthanotherlowincomepopulations.(Stegman&Faris,2005)

3.5

The act of seeking counseling is a valuable early warning indicator of financial trouble. Telephone and facetoface delivery appear to generate equivalent outcomes. Creditworthiness improved for debt management plan participants. (Plunkett,2006)

Methodologyofthestudy

Secondaryandprimarydatawerecollectedforthestudy.Maleandfemalewereselectedas sample unit. 20 male and 10 female were interviewed for this study. No statistical tools wereusedforthisstudy.

5
5.1

Findings
Introduction

The main activity of the Bank is banking related business. The activity includes deposit collection, extending credit facilities to different corporate organizations and small & mediumenterprises.TheBankissueATMCardstotheaccountholdersanditissuesCredit cardstothecustomersthroughitsPersonalBankingwing.Moreover,ithasdifferenttypes ofconsumercreditproductssuchasPersonalLoans,CarLoans,AnyPurposeLoan,Vacation Loansetc. 5.2 Analysis

Money is any good or token that functions as a medium of exchange that is socially and legallyacceptedinpaymentforgoodsandservicesandinsettlementofdebts.Moneyalso serves as a standard of value for measuring the relative worth of different goods and servicesandasastoreofvalue.Moneyisessentialtoeverybodyanditsmakethelifesimple and smooth. Its also facilitating our life standard. Credit is denominated by a unit of account.Unlikemoney,credititselfcannotactasaunitofaccount.However,manyformsof credit can readily act as a medium of exchange. As such, various forms of credit are frequentlyreferredtoasmoneyandareincludedinestimatesofthemoneysupply.Peoples use credit for fulfill their needs. They use it to buy required items or execute their usual demand.ThecreditcanbePersonalloan(MotorCycle,AirConditioner),Computerloan,and Carloanetc.Theyusetheircreditastheiremergencyneeds.Somepeoplesthinkthatwith thecredittheyhaveenabledtobuytheirnecessaryitems,somebodythinksthattheextra amountwillhelpthemtomeettheexpense.

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Fromthesurveywhichwehavedonebefore,wecanseethatfromtheFigure1,40%people thinkthatconsumercredit meetsenjoyingtheirlife,20%thinkthat consumer creditdoes notmeetsenjoyingtheirlifeandrestofthepeopledoesnothaveclearconceptaboutthat.

Figure1:Consumercreditmeetsenjoyingyourlife.

In Figure 2 we can see 60% people said that consumer credit increase their standard of living,20%peoplesaidNoandrestofthepeoplesaidsometimesconsumercreditincrease theirlivingstandard.

Figure2:Consumercreditincreaseyourstandardofliving.

From Figure 3 we can able to understand that, 40% people agree with, consumer credit relievestheirdistress,20%peopledoesnotagree,20%peoplesaidsometimesconsumer creditrelievestheirdistressand20%saidbitoff.

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Figure3:Consumercreditrelievesyourdistress.

Some people thinks that consumer credit developed and promoted mass prroduction for durablesgoods.Consumercreditpromotedhighemployentandintheresultofsurveywe can see from the Figure 4, that is 40% people agreed with the statement and rest of the respondentgavemixedanswers.Insourcountryconsumercreditcreatemorewealthand employment. Sometimes its preseve our sevings and the bank offered us convenience credit.Wetookcreditforourpressureofnecessaryandsometimesforearlyconsumption.

Figure4:Consumercreditcreateemployment.

In our questionnaire we found that, most of the family has the monthly expenditure of minimum Tk. 14,500/= to maximum Tk. 38,700/= and we assume their household income shouldbehigherthantheirexpenditureandthatisacceptableastheirborrowedamount. From the response of question about adjustments because of financial need. We found some mixed answers because of the respondents were mixed credit borrowers. We are showingtheanswersintheTable1asfollows:
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 Table1:ResponsefromtheborrowerabouttheAdjustmentoffinancialneedsfor borrowingcredit Statement Strongly Agree Neutral Disagree Strongly agree disagree Borrowedorusedcreditmorethanyou 40% 40% 20% usedto Changedfoodshoppingoreatinghabits 20% 40% 40% tosavemoney Reducedhouseholdsutilityuse 20% 40% 40% Cut back on social activities and 20% 40% 40% entertainmentexpense Cutbackonentertainmentexpense 20% 40% 40% Postponedmedicalordentalcare 60% 40% Fallonbehindinpayingbills 40% 60% Not registered for classes of your 40% 60% children Cannotaffordholiday 60% 40% Cannotaffordnightout 40% 60% Cannot afford friends or family for 20% 40% 40% meals Cannotaffordspecialmeals 60% 40% Cannot afford other than second hand 40% 60% clothes Cannotaffordleisureorhobbyactivities 100% Economic pressure can impact of your 40% 60% mentalhealth Createtensionsinmaritalrelationships 40% 60% Createconflictbetweensiblings 100% Affect the quality of the parentchild 100% relationship Impact the school performance of 40% 60% children In the view of Table 1 we can see that, the respondents have not faced any problems to maintain their family and they dont need to make enough adjustment for borrowing credits. In our survey we found different kinds of borrower. The purposes of credits are car loan, personalloan,computerloan.Theyrespondsomequestionsintheircreditcategory. For taking car loan the borrower gave some answers about their changes in lifestyle activities, interest as lifestyle variables, opinion attitudes as lifestyle variables, etc. They stronglyagreewiththeconsumercreditincreasedtheirsecurity&comfortabilitytogoto officeorworkingcenter.Theythoughitsincreasedenjoymentandcomfortabilitybyvisiting

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enjoyable place. Consumer credit increased their family members facility to go to a function,workingcenter,relativehouse,school,college,shoppingmallsetc.buttheyhave neutralviewforusingdurableproductsdiffertheirlifestylefromotheroftheirsocietyand tour. Inpersonalloan,samekindsofquestionswereaskedtotherespondents.Theygavealmost same answer for their questions. The borrowers used their personal credit for using purchasing air conditioner, motor cycle, etc. Another credit borrower was take computer loan. Shethinksitshelptofind,store, organizeanddisseminateinformationand improve herabilitytomaintainedaccountquickly&correctly.Itsalsohelpstosavetimebecauseof gettinginformation. 5.3 Problems Inthisassignmentnosuchproblemfound.Theborrowersalsohavenotenoughproblemsto takethecreditandrepaytheborrowingamount. 5.4 Recommendation As we mentioned the borrowers have not enough problems, so we dont have any comments or recommendation on that. In the overview we think, the bank should make easy the procedure of consumer credit system and generalize that to the mass people. Therearesomerestrictionsforconsumercredit,whichisnotsoeasytofulfillforeverybody. Sotherestrictionsforconsumercreditshouldbesimpler.

6.

Conclusion

Inconclusion,therightsof Consumershaveto betreatedfairlyandto havemore control overtheirfinancialaffairs.Theyneedtobeinapositiontomakemoreinformedborrowing decisions and to have clear and regular information on the state of their financial affairs. Consumersneedtobeabletochallengeunfairconductbylendersand,wheredisputesdo arise,haveaccesstoaquickandeffectivemeansofresolvingthem. Nothingdamagesconsumerconfidencequitelikebeingtreatedunfairlyorsimplyrippedoff. This affects not only the credit industry, but also the health of the economy as a whole. Responsiblelendershavetherightto operateinahealthyandcompetitivecreditmarket, wherebusinesssuccessisbasedonsoundinvestmentdecisionsandgoodcustomerservice. We have to build in the Bangladesh a consumer credit market that is fair, open and competitive:onethatprotectstheinterestsofconsumersandallowslenderstocompeteon afairandequalfooting.

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7.

References

Bashar, Shabbir A, Bangladesh : Economy, Finance and Banking, Business and Investment in Bangladesh,http://www.betelco.com/bd/bdsbus/economy.html DhakaBankLtd.www.dhakabankltd.com Dr. Econ (2001), What Is the Economic Function of a Bank, Educational Resources, http://www.frbsf.org/education/activities/drecon/2001/0107.html Hunt,RobertM,(2005),WhitherConsumerCreditCounseling?,BusinessReviewFederalReserve BankofPhiladelphia,FourthQuarter2005 Hurst, Peter, (2003), Organised fraud the consumer credit industry's response, Credit Management,2003 Kroszner, Randall S, Creating more effective consumer credit disclosures, Financial Services ResearchProgramPolicyForum,23May,2007 Plunkett,Travis(2006),CFAandAmericanExpressReportonFirstPhaseofResearchonConsumer CreditCounselingEffectiveness,AmericanExpress,June12,2006 Stegman, A. Michael & Faris, Robert (2005), Welfare, Work And Banking: The Use Of Consumer Credit By Current And Former TANF Recipients In Charlotte, North Carolina, Journal of UrbanAffairs,Volume27,Number4,pages379402

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