Friday, 29 September, 2023

Centralised Banking System: pros and cons

Centralised banking operation is that system of banking where processing of all transaction has to be carried out from a central location. In this system bank’s presence has to be made through maintaining sufficient number of branches and staffs. Now banking is done through modern technology; so all banking operations or processing activities can be carried out from a central location using appropriate technology. It is not a tough process for Banks. To comply with the international standard all Banks have to go on this Centralised process.

Banks have to maintain their central operation at their head office or some other locations which is treated as part of the head office. For the sake of convenience, better service and business volume, multiple central processing locations are maintained. Various banking applications or web-based software is developed and used in carrying out this Centralised operational process. Most tasks in Centralised banking system are web and technology based. Since it is not manual, it takes less time to complete tasks.

Centralisation of banking activities is possible through use of CORE (Centralised Online Real-time Exchange) banking software by Banks. CORE banking became possible with the advent of computer and telecommunication technology that allowed information to be shared between bank branches quickly and efficiently. According to a study of the Bangladesh Institute of Bank Management, 88 percent of banks in Bangladesh use Centralised  CORE banking systems, which are allowing them to cut cost and provide real-time services online to customers.

Before the 1970s it used to take at least a day for a transaction to reflect in the real account because each branch had their local servers, and the data from the server in each branch was sent in a batch to the servers in the data centre only at the end of the day (EOD). Over the following 30 years most banks moved to core banking applications to support their operations. It fosters the customer service in such a way that a customer can get most of the banking services in real time without transacting in the same place where his account operates.

The Bangladesh Institute of Bank Management (BIBM) has conducted a survey on the country's banking industry and the report exhibits that most banks are now considering reversing their de-centralised pattern of banking operations. The survey reveals that during the period 1980-90, country's banking industry had undergone extensive de-centralisation with the dual objectives of reaching banking business to remote areas and expediting services. It is learnt from the said survey report that most banks have realised that the de-centralised banking operations have unleashed many fraudulent and corrupt practices. Therefore, they are actively thinking of retransforming their operations from de-centralisation to Centralisation.

During the last three decades, country's private sector banking has also tremendously developed, and emphasis was always there to expand banking operations in rural areas. Therefore, opening of any new branch in the urban area was allowed after opening a number of branches in rural areas which indicates that a bank has to always maintain a certain ratio between its rural and urban branches. It is an undeniable fact that following the expansion of branch banking across the country, more and more people have got easy access to banking services and at the same time, the scope and business opportunity of banks have widened substantially.

However, expansion of this branch banking across the country does not represent bank's de-centralisation process as branches have never been delegated any authority to make decisions at operational level. Except account opening and remittance activity which are mainly a standard set of work, there is no decision-making authority at branch level. Even many banks do not allow branch managements to approve loan against cash collateral security which is known as risk free lending. Technically, de-centralisation of banking operation remains out of reach, so no question should arise about Centralisation.

There are a lot of disadvantages of Centralisation process of banking, among them vital three are:

(a) Slow decision making which deals with inappropriate and delay customer services,

(b) Decisions are based on opinions and feelings than on facts and lacks transparency in decision making process since the decision makers are dealing with paper not with the facts, figures and status,

(c) It’s a time consuming process; there is no scope to consider urgency, sudden incident and other reasons.

On the other hand, Centralisation banking can prevent scam, corruption, window dressing more than the de-centralisation process. If all Banks can implement Centralised banking system the recent large scam including Hall Mark scam can be prevented. Under the Centralised banking system, a bank manager looks after its business and all operations are rendered from its head office on the back of strong technological backbone. As a result, a traditional branch has just become a mere sales and services point and is banned from approving loans. Even a branch manager can't open an account without sending it to the central processing system.

The main objective of Centralised process is to reduce or eliminate corruption, embezzlement, fraud, and malpractices of bank officials at the branch level by inappropriately using their empowerment and authority. In Centralised process Banks can run with less manpower since all vital decision and task are completed in the Head Office level which leads to minimisation of cost. Centralisation has innumerable advantages as it expedites the process and electronically records all actions thereby reducing the scope of fraud and corruption. This system also improves efficiency and ensures responsibility and accountability of bankers.

In the context of Bangladesh, 100 percent Centralisation or de-centralisation cannot be implemented at any bank. Foreign Banks which are operated in the country are also providing services to its customers by following both methods. The expert opines that de-centralisation of some services will improve the quality of banking services. But the initiative should be implemented duly considering the potential risks and effects. So, for our country, the system should be developed in such a way that there must be increased monitoring so that customers get all kinds of services quickly.


Mir Mahmudul Haque Chowdhury, Banker