“No company other than Banking Company shall use the word Bank”. Explain the proposition referring the relevant provision of the Bank Companies Act, 1991

1.     Introduction

A broader definition of a bank is ‘any financial institution that receives, collects, transfers, pays, exchanges, lends, invests, or safeguards money for its customers.’ Banks also render services like issue of letter of credit and guarantee, remittance of money, collection of utility bills, underwriting of capital issues, portfolio management as well as locker services and a lot of other services. Many of the above functions are also performed by specialized non-bank financial institutions like finance companies, leasing companies, merchant banks, investment banks, pension funds, security brokers and dealers, mortgage companies, real estate investment trusts, etc. It is to be noted that although these financial institutions perform many of the functions performed by banks, they cannot be called a ‘bank’ or a ‘banking company’[1].

2.     Laws on banks and banking

The laws and regulations regarding formation administration and operation of banks are spread over several pieces of legislations supplemented by Bangladesh Bank’s[2] own prudential regulations issued from time to time. Of these laws, the most significant one regarding formation and running a banking company is the Banking Companies Act, 1991. It assigns important role to Bangladesh Bank to regulate as well as supervise the activities of the banks in Bangladesh.

3.     What does ’banking company’ and ‘banking’ mean?

The Banking Companies Act, 1991[3] defines ‘banking company’ as “any company which transacts the business of banking[4] in Bangladesh….” The Act goes on to define banking as “the accepting, for the purpose of lending or investment of money from the public, repayable on demand or otherwise, and withdrawable by draft, order, or otherwise”. Section 8[5] of the Act prohibits the use of any of the words  ‘Bank’ or any of its derivatives like ‘banking ’, or ‘banking company’ to a company other than a banking company.

The definition of a bank can be looked at from academic and statutory points of view. The statutory definition draws on the definitions given in the laws of the country. In Bangladesh the term ‘bank’ has been defined in various statues like Bangladesh Bank Order, 1972, Negotiable Instruments Act, 1881, as adapted in Bangladesh, the Money Loan Court Act, 1990, Non-Banking Financial Institutions Act etc. From the legal point of view the one relevant for our purpose is that given the Banking Companies Act. Section (o) of the Act defines banking company as—

“banking company” means any company which transacts the business of banking in Bangladesh and includes a new bank[6] and a specialized bank[7]:

Explanation: Any company which is engaged in the manufacture of goods and services on any trade and which accepts deposit of money from the public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this clause.”

The Banking Companies Act, 1991[8] goes on to provide a specific list of the types of business a banking company can undertake. The test of whether or not an enterprise is a banking company will depend on its fulfillment of the criteria laid down in the Act and the types of its activities. The Act also puts an embargo on use of the word ‘Bank’ as part of the name of an enterprise other than a banking company. Section 8 reads as follows:

“8. Use of the Word “Bank” or any of its derivatives.- Every company carrying on the business of banking in Bangladesh shall use the word “bank” or any of its derivatives as part of its name and no company other than a banking company shall use in its name any word calculated to indicate that it is a banking company”[9].

This provision makes it easier to distinguish a banking company from other enterprises and serves to settle the long drawn controversy about who can be called a ‘bank’. However, Grameen Bank, despite its name, is not a bank. This definition also prohibits cooperative banks from using the word ‘bank’ as part of its name. However, some of the old cooperative banks[10] who had been using this word, have secured court’s decision to continue to use the term ‘bank’ as part of their names.

In the early stages of banking in England, there were no elaborate laws on banking. Many people—goldsmiths, cloth merchants, brewers and other people with diverse background and professions—who could put together some amount of capital could open what looked like a bank, such as a proprietorship, some as partnership and later as limited companies. That provided opportunity for the academicians and jurists to make their judgments on the criteria that make a bank and those that do not. England can boast of some illustrious authorities on banking like Macleod, Dr. H.L. Hart and Sir John Paget.

As usual in the academic circles, the authorities are not unanimous in defining a bank. According to Macleod, “The essential business of a ‘Banker’ is to buy money and debts, by creating other debts. A banker is, therefore, essentially a dealer in debts, or credits.” A banker or bank, he says, “is a person or company carrying on the business of receiving moneys, and collecting drafts, for customers subject to the obligation of honoring checks drawn upon them from time to time by the customers to the extent of the amounts available on their current accounts.” He lays emphasis on ‘acceptance of deposits of funds withdrawal on demand’.

Sir John Paget’s[11] goes a step further to describe the conditions of deposit acceptance. He says, “No person or body, corporate or otherwise, can be a banker who does not (i) take deposit accounts, (ii) take current accounts, (iii) issue and pay checks, and (iv) collect checks, crossed and uncrossed, for his customers.” Paget also says that “one claiming to be a banker must profess himself to be one and the public must accept him as such: his main business must be that of banking from which, generally, he should be able to earn his living.” It means a person accepting deposits must rely on banking as his means of livelihood.

4.     Important businesses that a bank can do[12]

To understand the function of a banking company, we should focus on the list of essential businesses it is eligible to perform under the Banking Companies Act, 1991. The following are some of the important types of businesses that a bank can perform in terms of the Banking Companies Act, 1991.

• Collection, borrowing or raising funds from the public and corporate entities etc;
• Lending or advancing of money with or without security;
• Issuing of letter of credit, traveler’s checks, credit card and circular notes;
• Buying and selling of foreign exchange including foreign bank notes;
• Purchasing and selling of bonds, scripts or other forms of securities….[13] And such other instruments as may be approved by the Bangladesh Bank;
• Providing of safe deposit vaults;
• Collecting and transmitting of money and securities;
• Issue guarantee and indemnity.

Many of the above functions are also performed by specialized non-bank financial institutions like finance companies, leasing companies, merchant banks, investment banks, pension funds, security brokers and dealers, mortgage companies, real estate investment trusts, etc. Although these financial institutions execute many of the functions performed by banks, they cannot be called a ‘bank’ or a ‘banking company’.

5.     Non-bank financial institutions

A new breed of financial institutions, known as non-banking financial institutions[14], in short NBFIs, is playing an increasingly important role in the field of financial intermediation in Bangladesh. Their emergence in the financial scene signals the process of financial deepening and advent of an era of specialized financial services. Although these financial institutions perform many of the functions performed by banks, they cannot be called a ‘bank’ or a ‘banking company’.

6.     What these finance companies can do?

To understand what differentiates a non-bank financial company from a bank, we should give emphasis on major tasks a financial is eligible to do and tasks that are restricted for them to perform. A regular enactment for setting up and regulating the activities of the finance companies was made through The Financial Institutional Act, 1993. The Financial Institutional Act, 1993 defines the functions a finance company can undertake. These functions are:

• Grant of loans or advances for financing industry, commerce, agriculture or housing;
• Underwriting and investment in shares, stock, bonds, debentures or debenture stock or securities issued by the Government or any local authority;
• Hire purchase transactions including leasing of machinery or equipment;
• Provide finance for venture capital; and
• Undertake the business of a merchant bank, investment company, mutual association, and mutual company, leasing company or building society.

While all financial institutions have a common basis for their operations and some function with respect to lender-borrower relationships, there are some fundamental differences between the banks and NBFIs.[15] The operations of NBFIs in Bangladesh are regulated by the Bangladesh Bank.

7.     What these finance companies cannot do?

Under the Act finance companies[16] cannot:

• Accept any deposit which can be withdrawn by check, draft or order drawn by the depositor;
• Deal in gold or foreign exchange;
• Grant unsecured advances, unsecured loans or unsecured credit facilities which in the aggregate and outstanding at any time exceed 10% of the paid up share capital and reserves of the financial institution to any firm in which any of its directors has any interest;
• Give any loans or advance against the security of its own share;
• Engage in the wholesale or retail trade including the import or export trade, except for the purpose of carrying on its financing business;
• Acquire or hold any part of the share capital of or otherwise have a direct interest in, any financial, commercial, agricultural, industrial or other undertaking exceeding 25% of the paid-up share capital and reserves of that financing institution;
• Purchase or hold any immovable property of value exceeding 25% of the financial institution’s capital excepting immovable property for the purpose of providing amenities for its stuff or which has been acquired in the interest of security for repayment of debt.

Bangladesh Bank has framed separate regulations under this Act. It also issues administrative instructions from time to time – some to provide guidelines on operational aspects, others to tell the finance companies what they can or cannot do.

8.     Conclusion

From the above discussion, it is conclusive that the word ‘bank’ can only be adjoined to a company that correspond to a specific list of the types of businesses as per provisions made in Act No. 14 of 1991. This Act may be called the Banking Companies Act, 1991. This Act defines a banking company as a unique entity and restricts the use of its name in a limited manner. Section 8 of this Act suggests that all companies that are performing banking operations should attach the name ‘bank’ with their company and any other companies that are not doing banking businesses are restricted to use this word with them. Moreover, it is evident from the Act that the business of banking can be clearly differentiated from other financial institutions and co-operative banks that functions closely and quite similarly to those banking companies. Thus the provision provided in the Act makes it easier to distinguish a banking company from other enterprises and serves to settle the long drawn controversy about who can be called a ‘bank’. Finally, lists of forms of business done by banks and finance companies enables us to encounter the difference between their core functions. Along with that there are also highlights to illustrate the businesses the finance companies are restricted to do.