Internationalization of Bangladesh Banking Sector: Lessons from an Emerging Economy

Abstract

Banks embrace internationalization at the fastest pace driven by advanced technology and ever-increasing inter-connectedness of the business world. Although bank internationalization in the emerging economies is often backed by high economic growth potential, significant barriers remain. This case presents, in the context of Bangladesh as a leading emerging economy, an account of the nature and extent of bank internationalization, its impacts, related challenges, and policy implications. The Bangladesh banking sector shows a rising internationalization trend mainly due to domestic market saturation and the need for innovation. However, it appears that the banks follow unusual internationalization path coupled with multi-dimensional strategic challenges and adverse financial impacts. In the end, the case poses several critical questions concerning both managerial and regulatory implications of bank internationalization.

Teaching Note

Case Synopsis

This case aims to provide an overall state of internationalization of Bangladeshi banks, as a reference to the emerging economies. Since Bangladesh is one of the fastest growing economies of the world and is expected to be one of the leading economies by 2050 in terms of economic power, it is important that the banking sector grows sustainably and, therefore, bank internationalization wave complements this growth. As the “engine of economic growth,” banks are the dominant players in Bangladesh’s financial market. Due to quick market saturation and a highly competitive domestic market and the need for innovation, banks in Bangladesh are tending to move toward international markets.

This case, with respect to Bangladeshi banks, provides information on the nature and extent of international banking activities, their impacts on performance, and tries to explore the related challenges and policy perspectives. Bangladeshi banks do not follow the usual internationalization path, tend to be biased toward cost-intensive modes and allow significant independence to the international operations, however, face several challenges and deficiencies. Internationalization, achieved so far, has a general negative impact on the performance of the banks although the banks believe it is beneficial for them. As a result, banks tend to expand their international activities more. Based on the findings and discussions available, several questions come forward that must be addressed by the policy-makers and academics to ensure that bank internationalization in Bangladesh can be a perfect complement to the nation’s high rate of economic growth.

Teaching Objectives and Academic Positioning

The case provides information for analysis that is very critical for both the managers, academics and policy-makers. As a result, the learners (or students) of the case should be able to get a comprehensive understanding on how bank internationalization has taking off in emerging economies. The learners will be able to realize lessons on at least the following particular areas:

• Degree and nature of internationalization of Bangladeshi Banks

• Diverse measures of internationalization that can be utilized to examine banks

• Managerial challenges in advancing bank internationalization in a fast-growing economy

• The nature of financial and operational impacts of internationalization on the overall sector

Suggested Teaching Method

While relevant information and data are available in the case, it is recommended to advise the learners to look for additional data, information, and reading in studying the case and addressing the discussion questions. A list of such additional sources is outlined at the end of this teaching plan.

While discussion will require utilizing the information given in the case, a background understanding on Bangladesh’s economy may be effective in case the audience lacks enough information on the country. Prior to beginning with the case discussion, spending 10–15 minutes on the overall economic indicators of Bangladesh would be useful in such instances. This will complement the general introduction to Bangladesh and the performance of the country’s banking sector provided in sections “Background” and “An Overview of the Banking Sector in Bangladesh” of the case. The discussion should also reflect the generalized focus of this case on bank internationalization in developing countries, considering Bangladesh as an example.

Section “Bank Internationalization: Trends and Patterns” of the case delivers the main discussion on the nature and patterns of the ongoing internationalization process in the sector. As there are limited external materials on the discussion presented in this section, the mentor would have to rely on mainly the data and information presented within the case. For additional reading on Bangladeshi banks’ internationalization, the two root articles by Barua et al. (2017) and Khan and Barua (2016) can be used as further references. The mentor has to explain to the leaners that this case discussion is an outcome of a survey-based study. In this section, further references on the concepts, measurements, and theories of internationalization may also be discussed in case the learners are less oriented to these concepts (please see additional readings).

Section “Managerial Aspects in Internationalization” highlights the key managerial issues with respect to the internationalization of the banks, i.e., motivation, policy orientation, independence, and developing human resources. The mentor should highlight that these four areas are critical for top management in any bank that wants to enter or expand in the international market. The mentor can provide a general overview on the role of the four key areas in managerial decision making before beginning the chapter.

Section “Managerial Challenges of Internationalization” discusses the managerial challenges faced by the banks in Bangladesh in their internationalization process. As a result, this section is very critical with respect to the objective of the case. Understanding the challenges and their role in obstructing the internationalization process would provide perspectives to the learners on generic difficulties faced by banks in an emerging economy. The world’s most international banks are from developed countries. Hence, given the challenges in this section, the mentor should provoke the discussion as to what makes the real differentiation in becoming more internationalized financial institutions between developed and emerging economies.

Section “Internationalization Impacts on Financial Performance” provides two dimensions of the impacts of internationalization. The mentor should first discuss the “perceived impacts” carried by the top management of the banks. Then turning to the quantitative evidence, the mentor should highlight the how much the perceived impacts are true and what contradictory perceptions the top management carry. This section is a key section of the case where the mentor would be able to evidence that whatever “perception” or “feeling” top management of banks have may not be entirely true, and therefore, looking at the quantitative evidence is necessary for a bank management to understand the real impact. It is important to note that Bangladeshi banks do not keep much record of their international operations separately and hence, they are highly likely to hold perception contradictory to the quantitative evidence.

The final section closes the case, explaining the policy matters from regulatory aspects and provoking the complementary role of internationalization in a fast growing economy. The mentor should engage the learners into discussion as to how lack of regulation may deter a sustainable internationalization process and how a smooth and sustainable internationalization of the banking sector may truly complement the economic growth of a country.

Suggested Discussion Questions and Analysis Keys

Three critical discussion questions are suggested below. However, the mentor should exercise the description to generate more relevant discussion questions additionally, as deemed necessary based on the teaching/training/workshop requirements. In addressing the discussion questions, learners should be allowed or advised to utilize data and information from additional reading and other external sources in addition to the case detail in order to make the learning highly vibrant, resourceful, and impactful.

• 1. From a managerial perspective, summarize your understanding of the overall internationalization of Bangladeshi banks. Based on your understanding, do you think the sector is progressing on the right track?

  The question relates to mainly section “Bank Internationalization: Trends and Patterns.” The question should be answered by pointing out the general trends and patterns, for example, number of banks engaged in international banking, analyze their product and country portfolio, incentives and motivations for internationalization, and so on. In addition, the learners would evaluate how sustainable the current internationalization wave is given the current sectoral situation and country’s economic environment, for example, is it too aggressive or too defensive? Are the modes of international entry/expansion appropriate? Is it the right time to adopt internationalization? Can the current internationalization trend complement the fast economic growth? Therefore, the learners will generally evaluate the entire internationalization wave going on.

• 2. What are the major motivations and challenges that bank managers face in Bangladesh ? Rate the challenges in terms of the immediate attention needed. How would you recommend that these challenges be dealt with?

  The question is mainly relevant to sections “Managerial Aspects in Internationalization” and “Managerial Challenges of Internationalization.” The learners should discuss each and every incentive and challenges reported. The challenges should be discussed in terms of how many ways and to what degree each of them can impact the current and future internationalization progress. Then the learners would have to make a rating based on their own justification and reasoning. The learners then would be required to devise appropriate policy and regulatory recommendations from the perspective of top management of banks to mitigate each of the challenges. The learners would also have to identify how applying their recommendations will help improve the sustainability and potential benefit of internationalization, from the perspective of top management of the banks.

• 3. Internationalization impacts financial performance negatively; however, management of many banks believe it is bringing good to them and the sector should go ahead. Evaluate the situation and discuss on the role of central bank to facilitate internationalization that could generate positive returns.

  This question is mainly relevant to section “Internationalization Impacts on Financial Performance.” The learners will carefully study the section and then try to justify the differences between the perceived impact and the quantitative evidence. The learner should try to evaluate the correctness of the perception of the bank managers, given the whole case context. In addition, the learners should look at the quantitative evidence and try to explain the potential reasons behind the impacts of each internationalization variables on different performance measures. In the context of this understanding, the learners should again try to evaluate the risks and benefits of the current internationalization wave in Bangladeshi banking sector and suggest future directions with specific discussion on possible regulatory efforts for Bangladesh Bank, the central bank of Bangladesh, to monitor, facilitate, and regulate the overall internationalization process. Such regulatory efforts may include, but not limited to, monitoring the cost-intensive international expansion of the banks, preventing banks to expose to high-risk international markets, ensure greater data security, preventing banks from unhealthy expansion, avoiding systemic risk, i.e., sectoral vulnerability to external economic shocks.

Additional Reading

Bangladesh Bank. (2017). https://www.bb.org.bd/. Accessed 15 Aug 2017.

Barua, S. (2015). “Survey on Internationalization of Bangladeshi Banks”, Research Project at the Department of International Business, University of Dhaka.

Barua, S., Khan, T., & Barua, B. (2017). “Internationalization and Performance: Evidence from Bangladeshi Banks”, The Journal of Developing Areas, vol. 51, no. 2, pp. 105–118.

Buch, C.M., Koch, C.T., & Koetter, M. (2013). “Do Banks Benefit from Internationalization? Revisiting the Market Power-Risk Nexus”, Review of Finance, European Finance Association, vol. 17, no. 4, pp. 1401–1435.

de Wit, H., Gacel-Ávila, J., Jones, E., & Jooste, N. (eds.). (2017). The Globalization of Internationalization: Emerging Voices and Perspectives, Routledge.

Khan, T. & Barua, B. (2016). “Internationalization of Bangladeshi Banks: What Can We Learn?” American Journal of Trade and Policy, vol. 3, no. 3, pp. 109–117.

Rybczynski, T.M. (1986). “The Internationalization of the Financial System and the Developing Countries: The Evolving Relationship”, Staff Working Paper no. SWP 788. Series on International Capital and Economic Development; no. 4. Washington, DC: The World Bank. http://documents.worldbank.org/curated/en/429611468782145960/The-internationalization-of-the-financial-system-and-the-developing-countries-the-evolving-relationship. Accessed 17 Aug 2017.

Slager, A. (2006). The Internationalization of Banks Patterns, Strategies and Performance. Palgrave Macmillan.

Wheeler, C., McDonald, F., & Greaves, I. (eds.). (2003). Internationalization Firm Strategies and Management. Palgrave Macmillan.