The Financial Express

Centralised versus decentralised banking system

Centralised versus decentralised banking system

Centralised banking operation is that system of banking where processing of all transactions 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.

Banks have to maintain their central operation at their head office or some other location 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 are developed and used in carrying out this centralised operational process. Most of the works in centralised banking system are web and technology based.

Centralisation of banking activities is possible through use of CORE (Centralised Online Real-time Exchange) banking software. CORE banking became possible with the advent of computer and telecommunication technology that allowed information sharing between bank branches quickly and efficiently. According to a study of the Bangladesh Institute of Bank Management (BIBM), 88 per cent of the banks in Bangladesh have used 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 its 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. Over the following 30 years or so, most banks moved to core banking applications to support their operations. It fostered customer service in such a way that a customer can now get most of the banking services in real time without transaction in the same bank branch where his account lies.

The BIBM's survey referred to above shows that most banks are now considering reversing their decentralised pattern of banking operations. The survey reveals that during the period 1980-90, country's banking industry had undergone extensive decentralisation 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 decentralised banking operations have unleashed many fraudulent and corrupt practices. Therefore, they are thinking of retransforming their operations from decentralisation to centralisation.

During the last three decades, country's private sector banking developed tremendously, 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 the branch banking across the country does not represent bank's decentralisation process in true sense of the term as branches are not delegated full 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 loans against cash collateral security which is known as risk free lending.

Technically, decentralisation of banking operation has, so far, remained out of reach, so no question should arise about centralisation.

There are many disadvantages of centralised banking. The most notable among them is slow decision making resulting in delayed customer service. On the other hand, centralised banking can prevent scams and corruption. It is commonly believed that if banks could strictly maintain centralised banking system, the banking scams like that of Hall Mark could have been prevented.

Under the centralised banking system, a bank only looks after its day-to-day business activities, and all operations are rendered from its head office with the aid of technology. As a result, a traditional branch has become a mere sales and service point.

The main objective of centralised banking is to reduce or eliminate corruption, embezzlement, fraud, and malpractices of bank officials at the branch level by inappropriately using their authority. In centralised system, banks can run with less manpower since all vital decisions are taken and tasks done by the Head Office which leads to minimising the cost.

In the context of Bangladesh, 100 per cent centralisation or decentralisation cannot be implemented at any bank. Foreign banks operating in the country are also providing services to their customers following both methods. Experts opine that decentralisation of some services will improve the quality of banking services. But the initiative should be implemented considering the potential risks. 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 is a banker. leon_83ais@yahoo.com

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