“Relation between Bank and Financial Institution, discuss with relevant laws.”

Introduction

Financial Institutes can be broken down to two types –

1.                                 I.            Banking Companies
2.                              II.            Non-banking Financial Institutes

Banking Companies are governed by the Banking Companies Act, 1991, while non-banking financial institutes are governed by Financial Institution Act, 1993.

These two types of institutes can be very different based on following areas, but not restricted only to these:

1. Deposit amount
2. Withdrawal procedure (cheque, draft or order)
3. Transaction instruments (currency, gold, other negotiable instruments, etc.)
4. Interest rate (maximum rates; regulations)

Similarities also exists between them on many grounds, such as, they both can lend money. However, for a banking institute, it is a phase of business, while for non-banking financial institute lending is essential. Both type of institutes are liable to Bangladesh Bank for top management related issues and mischief activities as cited in respective Acts of law.

Since both types of financial institute shape money market of the country, Bangladesh Bank’s strong intervention can be observed every once in a while. However, involvement of the central bank is highest in banking activities as the mass is largely affected by a bank than any non-financial institutes.

Banking Institute

All banks in Bangladesh are subjected to Banking Companies Act, 1991.

The definition of and terms relevant to a banking institution is mentioned in Section – 5 of the Act.

Clause (o) of Section – 5 of the Act provides definition of a banking company.

“A company that spread its wings to manufacture of goods or carries on any trade and which accepts deposits of money from public only to suffice financing needs of its business operations is not considered and will not be allowed to conduct banking institution.”[1]

Essential characteristic of a banking institute (limitation of financial institutes other than bank) is as follows:

“Power of receiving money on deposit from customer and honoring their cheques is the essential characteristics of banking. In absence of such power, mere power of granting loans does not make company a banking institution.”[2]

Clause (q) of Section – 5 of the Act defines bank. Notes on the clause suggest that receiving deposit from customers and honoring their cheques is the core of banking, while lending or investments of money may be one phase of banking business, most certainly not the main phase or distinguishing phase.[3]

Section 7 – 50 of the Banking Companies Act, 1991 provides guideline about the business of banking companies. The guideline suggests what the bank can do and cannot do, if they do or do not do something, how they should do it or to avoid it, etc. The gist of the Act of banking company is that they cannot be involved directly or indirectly on investing a venture, the owners’ and the board of directors and their family members and close relatives cannot take unfair advantage from the banking institution.

An outline had been drawn regarding the Act by Bhuiyan (1996)(Bhuiya, 1996, pp. 23-32).

Non-banking Financial Institute

All financial institutes in Bangladesh are subject to The Financial Institution Act, 1993.

A financial institute can –

(i)                  Give loan or advances for industry, commerce, agriculture or housing; or

(ii)                Carries on business of underwriting or acquisition of, or the investment or reinvestment in, shares, stock, bonds, debentures or debenture stock or securities issued by government or any local authority, or

(iii)               Carries on business of hire purchase transactions including transactions including leasing of machinery or equipment; or

(iv)              Finances venture capital

(v)                Gives loan for house building and property purchases (bank cannot provide loans for land purchases)

(vi)              Uses its capital to invest in companies (limitation of a bank)

Section – 14 of the Financial Institution Act[4] (non-banking) prevents a non-banking financial institute from:

1.                                  i.            Accepting deposit that is payable on demand by cheque, draft or order drawn by depositor
2.                                ii.            Dealing in gold or foreign exchange of any kind (banks can transact with these negotiable instruments)
3.                               iii.            Ratio of fund that can be disbursed with or without the need of Bangladesh Bank’s approval.

Section – 15, 16 and 17 of the Act prevents non-banking financial institution from trade, investment and holding of immovable property.

Section -18 of the Act[5] states the authority of Bangladesh Bank on non-banking financial institutes.

An outline had been drawn regarding the Act by Bhuiyan (1996) (Bhuiya, 1996, pp. 82-87)

Bibliography

Bhuiya, M. B. (1996). Bangladesh Laws on Banks and Banking.Dhaka: M. Haider Chowdhury