Chapter FourEstablishing New Banks, Branches, ATMs, Telephone Services, and Web Sites

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Key Topics

•Establishing ▫New Banks▫Branches▫ATMs, Internet and Online Banking, Mobile

Banking

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Questions/Considerations for Organizers of New Banks

• Population and Geographic Boundaries of Primary Service Area (PSA)

•Competing Financial Institutions in PSA•Number and Types of Businesses in PSA• Traffic Patterns in PSA• Population Growth in PSA•Banking History in PSA•Amount and Holders of Stock in New Bank•Business and Banking Experience of

Organizers• Projections for New Bank in First 3 to 5 Years

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Establishing A New Bank

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Internal Factors that Affect Decision for New Bank

•Qualifications and Contacts of Organizers

•Management Quality

•Capital Pledged

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Establishing A New Bank

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External Factors that Affect Decision for New Charter

•Level of Economic Activity

•Growth of Local Economic Activity

•The Need for a New Bank

•Local Competition in Supplying Financial Services

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Establishing A New Bank

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Guidelines To Establish ABanking Company In Bangladesh

• According to Section 31 of the Banking Companies Act, 1991

• Must obtain a license from Bangladesh Bank▫ 1. Status of the new commercial bank.▫ 2. Paid up capital requirement for a bank to be

established:▫ 3. Mode of payment:▫ 4. Sponsors and share capital contribution:▫ 5. Fit and Proper Test for Sponsors/Directors▫ 6. Management of the proposed bank▫ 7. Operation of the proposed bank.▫ 8. Required documents/ information/ analysis to be

submitted to Bangladesh Bank Source: http://www.bangladesh-bank.org/

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Establishing A New Bank

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• 1. Status of the new commercial bank:▫Public limited company incorporated in

Bangladesh• 2. Paid up capital requirement for a bank to

be established:▫Not be less than Taka 400.00 Crore▫Share capital will be formed with ordinary

shares only• 3. Mode of payment:▫Capital contribution shall be in a liquid

form such as cash or approved securities

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Guidelines To Establish ABanking Company In Bangladesh

Establishing A New Bank

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• 4. Sponsors and share capital contribution: ▫ Issue public shares within three (3) years▫ The minimum shareholding stake of each sponsor

shall be Taka 1.00 crore and the maximum shall be 10% of the proposed bank’s total share capital.

▫ The sponsors' shares shall not be transferred within a period of three (3) years

• 5. Fit and Proper Test for Sponsors/Directors▫ Competence, integrity and qualifications of the

Sponsors: criteria include: (i) skills and experience in relevant financial

operations (ii) no record of criminal activities or adverse

regulatory

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Guidelines To Establish ABanking Company In Bangladesh

Establishing A New Bank

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• 6. Management of the proposed bank:▫ Multi directorship is not allowed▫ The Member of Board of Directors shall be

restricted to 13▫ Not more than two members from a family▫ Experience of CEO: at least 15 (fifteen) years in

banking

• 7. Operation of the proposed bank:▫ The ratio of urban and rural bank branch has to be

1:1 ▫ New Bank has to ensure finance at least 5% of its

total lending into agricultural sector▫ Proposed bank should take part in Corporate Social

Responsibility (CSR) activity. The new bank should spent 10% or more of its previous

year‘s net income to CSR.

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Guidelines To Establish ABanking Company In Bangladesh

Establishing A New Bank

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• 8. Required documents/ information/ analysis to be submitted to Bangladesh Bank▫ A bank draft in the amount of Taka 10 (Ten) lakh▫ Name and address of the Applicant;▫ Name, address, telephone number of the contact person;▫ Feasibility Report on the proposed banking company (see

Annex II),▫ Biographical Reports (see Annexes III and IV)▫ Proposed compensation package and other terms of

contract of the CEO;▫ Minutes of the shareholders (sponsors) meeting;▫ Written agreement by the shareholders to organize the

banking company;▫ Sponsors have to submit a business plan▫ Draft Memorandum and Articles of Association;▫ Joint Venture agreement, in case of foreign equity

participation.

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Guidelines To Establish ABanking Company In Bangladesh

Establishing A New Bank

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Desirable Sites for New Branches• Heavy Traffic Count• Large Number of Retail Shops and Stores • Above Average Age of Local Populations• Area Contains Substantial Number of Managers,

Business Owners and Professionals• Steady or Declining Number of Service Facilities

Operated by Competitors• Above Average Population Growth• Above Average Population Density• Relatively High Target Population per Branch • Above Average Levels of Household Income

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Establishing A New Branch

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Expected Rate of Return• The Decision of Whether to Establish a Branch

Office is a Capital Budgeting Decision. • The Present Value of the Net Future Cash Flows

Should Be Larger Than the Initial Outlay

Expected Rate of Return from Opening a New Branch

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nn

rErErEwCashOutflo NCFNCFNCF

)](1[.....

)](1[)](1[ 22

11

Acceptance Criteria: E(r) ≥ k (Where k is the minimum acceptable return)

Establishing A New Branch

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Geographic Diversification

• Reducing a Bank’s Overall Risk Exposure to its Total Return• By Establishing Service Facilities in Different Market Areas• Whose Individual Returns are Not Highly Correlated with the Returns

from a Bank’s Existing Market Locations

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)()1()()( OABT REWREWRE

OABOABOABT WWRWRWR ,22222 )1(2)()1()()(

1. Expected Return

2. Risk (Variance> Standard Deviation)

Establishing A New Branch

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Automation : ATMs• Less Costly to Set Up and Operate (about 36%

compared to a human teller per transaction)• But Less Effective at Cross Selling, Less Personal

Service, and More Vulnerable to Criminal Activity • Decision to Install ATM: ▫ The Bank Examines the Present Value of the Stream

of Cash Savings from the New ATM Machine

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Net Present Value of the New

ATM

Present Value of the Stream of Cash Savings from New ATM

Total Cash Outlay for the

New ATM= -

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Automation : Services Provided Through the Internet

•Verify Real-Time Account Balance•Move Funds Instantly Among Accounts•Confirm Deposits Made, Checks Cleared

and Online Transactions Have Taken Place•View and Print Images of Checks•Place Orders for New Checks•Submit Applications for Loans and Credit

Cards•Carry Out On-Line Bill Paying

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The Internet and Customer Safety

•Especially Vulnerable to Fraud and Identity Theft

•Authentication Factors▫Something a Customer Knows▫Something a Customer Has▫Something a Customer is

•Move to Multi-Factor Authentication From Single Factor Authentication Today

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•Mobile phone penetration rate is very high in Bangladesh:• As of August 2011, Bangladesh has 79.677

million subscribers in total and the penetration rate was estimated at 48.199% over a population estimate of 158 million

•12 bank already got licenses •Easy access to rural areas

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Automation : Mobile Banking