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North South University

School of Business (MBA Program)


Course Title: Economic Condition Analysis (Bus-530)
Faculty: Dr. Salehuddin Ahmed (Former Governor, Bangladesh Bank)

Term Paper:
“Financial system of Bangladesh: Role in
development of the Country.”

Name: Mohammad Motaher Hossain


Student ID no.: 10100349060
Semester: Spring’ 10
Section: 01
Financial System in Bangladesh: Role in Development of the country.

Table of Contents:

Topic Page no.


Abstract 03
Introduction 04
Major Components of Financial System in Bangladesh and their role 04
Reforms in financial sector in last few decades 06
Performance of Banks & Financial institutions 08
Access to finance for small & medium enterprise 09
Suggested measure to improve the performance of Banks & Financial institutions 12
Concluding remarks 15
Bibliography 16

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Financial System in Bangladesh: Role in Development of the country.

Abstract:

Without a sound financial system it is quite difficult and expensive to allocate resource and shift
risks to its lowest level (low economic development). Financial system plays an important role
in the economic development and it is divided into financial markets and institutions. The role
of the financial system is to gather or pool money from people and businesses that have more
than they need currently and transmit those funds to those who can use them for either
consumption or investment.

A healthy economy is dependent on efficient transfers of resources from people who are net
savers (surplus) to firms and individuals who need capital. Without efficient transfers, the
economy simply could not function. Obviously, the level of employment and productivity,
hence our standard of living, would be much lower. Therefore, it is absolutely essential that our
financial market functions efficiently, not only quickly, but also at a minimal cost.

The financial system in Bangladesh includes Bangladesh Bank (the Central Bank), scheduled
banks, non-bank financial institutions, microfinance institutions (MFIs), insurance companies,
co-operative banks, credit rating agencies and stock exchange. Among scheduled banks there
are 4 nationalized commercial banks (NCBs), 5 state-owned specialized banks (SBs), 30
domestic private commercial banks (PCBs), 9 foreign commercial banks (FCBs) and 29 nonbank
financial institutions (NBFIs) as of December 2006. However, Rupali Bank, an NCB is being sold
to a foreign buyer, and once this transaction is completed, the country will have only 3 NCBs,
which are being corporatized. Over and above the institutions cited above, three development
financial institutions namely House Building Finance Corporation (HBFC), Ansar- VDP Unnayan
Bank and Karma Shangsthan Bank are operating in Bangladesh, all of which are state owned.

This paper is written to describe the past & present state of the financial system of Bangladesh
and its role to the economic development of a nation. It highlights reforms that took place over
the few decades. It also attempts to provide suggestions for more betterment of the present
state of the financial system so that, it can be more vibrant to speed up the overall
development process of the country.

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Financial System in Bangladesh: Role in Development of the country.

Introduction:

Financial system is a system which tones up the savings-investment process of a country.


Financial system plays a significant role in the economic development of a country. The
importance of an efficient financial sector lies in the fact that, it ensures domestic resources
mobilization, generation of savings, and investments in productive sectors. In fact, it is the
system by which a country’s most profitable and efficient projects are systematically and
continuously directed to the most productive sources of future growth. The financial system
not only transfers funds from savers to investors, it also selects projects which will yield the
highest returns, accumulates sufficient quantities of capital to fund the range of investment
projects across economic activities, accounts for price risks across assets, monitor performance,
and enforce contracts. According to the McKinnon- Shaw hypothesis (1973), the conventional
wisdom is that flexibility and efficiency of the financial system are crucial to the growth and
development of a market economy. A comprehensive study by King and Levine (1993) from
across 119 developed and developing countries over the 1960-1989 period provides compelling
evidence that economic growth is dramatically dependent on the size of financial sector, credit
to private sector and enterprises and interest rates. The larger the financial sector in the
context of the overall economy, the greater the share of lending by depository rather than
central banks, and the greater the share of credit to private sector rather than public sector, the
greater is the rate of economic growth.

Major Components of a Financial System and their roles:

The financial sector in Bangladesh basically comprises the money and capital markets,
insurance and pensions, and microfinance. In addition to the Bangladesh Bank (The Central
Bank) there are 4 state-owned commercial banks (SCBs), 5 state-owned specialized banks, 30
domestic private commercial banks (PCBs), 9 foreign commercial banks, and 29 nonbank
financial institutions (NBFIs) as of 2008. Figure 1 depicts the components of the financial sector
in Bangladesh in brief.

Like many other developing countries, the financial system of Bangladesh is mainly bank
dependent. While the Bangladesh Bank has regulatory and supervisory jurisdiction over the
entire banking subsector as well as the NBFIs, the Securities and Exchange Commission (SEC)
exercises similar functions for the stock exchanges and the merchant banks. Most of the
institutions in the financial sector are characterized by a mix of public and private ownership.
The specialized banks are often called development finance institutions (DFIs). Out of the five
specialized banks, the Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank were created
to meet the credit needs of the agriculture sector, while the Bangladesh Shilpa Bank and
Bangladesh Shilpo Reen Shangstha were set up to extend term loans to industry.

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Financial System in Bangladesh: Role in Development of the country.

Of the 29 NBFIs, 1 is government owned, 15 are local (private), and the other 13 were
established as joint ventures with foreign participation. The Office of the Chief Controller of
Insurance (OCCI) has supervision authority over the insurance industry. General insurance is
provided by 21 companies and life insurance is provided by 6 companies. The industry is
dominated by the two large, state-owned companies - the Shadharan Bima Corporation for
general insurance and the Jibon Bima Corporation for life insurance - which together command
most of the total assets of the insurance subsector. Microfinance institutions grew rapidly and
microcredit programs in Bangladesh are implemented by various formal financial institutions
(SCBs and specialized banks), specialized government organizations, and nongovernment
organizations (NGOs). The Government of Bangladesh enacted the Microcredit Regulatory
Authority Act 2006 on 16 July 2006 to improve transparency and accountability in the activities
of the country’s microfinance institutions. The Microcredit Regulatory Authority has been
established to implement the act and to bring the microcredit subsector under a full-fledged
regulatory framework.

Financial System in Bangladesh

Money Market Capital Market Microfinance

1. Bangladesh Bank Insurance, 1. Non


Securities Market Government
2. All Banks pension &
provident fund Organizations
3. Non-Bank (NGOs)
financial 1.Securities & 2. Palli Karmo
institutions Exchange Shahayok
1. Controller of
Commission Foundation (PKSF)
4. Money Changers Insurance
2. Stock 3. Grameen Bank
5. Credit rating 2. General and
Exchanges: DSE,
agencies life insurance 4. Bangladesh
CSE
Rural
3. Investment companies Development
Corporation of 3. Government Board
Bangladesh
Pension Scheme 5. Other non-
4. Merchant government and
Bank 4. Central
Provident development
organizations.
Fund
5. Private sector
pension funds
(typically small)

Figure 1: Financial System in Bangladesh,


Source: Policy Analysis Unit (PAU), Bangladesh Bank.

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Financial System in Bangladesh: Role in Development of the country.

Reforms in financial sector over last few decades:

Many countries of the world have undertaken reform measures for their financial sector since
1970s, though the motivation for reforms varies from country to country. Reforms are initiated
basically to improve the financial intermediation and ensure efficient allocation of financial
resources and in ultimate analysis improve the competitiveness of the private sector and
thereby promote investment and growth in the real sector. The key targets of the financial
sector reform program are:

1. To bring about greater autonomy of the Central Bank.


2. Strengthening the capabilities of the Central Bank to perform its enhanced
responsibilities.
3. Strengthening prudential regulations and supervision.
4. Restructuring the management and internal processes of NCBs and ultimately
privatization of selected NCBs and DFIs.
5. To promote competition by creating level-playing fields.
6. Strengthening the legal and judicial processes.
7. To improve the money and debt market condition.

The reforms in the financial sector of Bangladesh can be segmented into some phases.

Phase-1:
Phase-1 basically started in the early 1980s and during this phase, there was a major policy shift
in the financial system as because private sector banks were allowed to operate. In addition to
the 19 public sector and foreign banks, 10 new private banks started their business during this
period. Thereafter, another 7 and 13 banks were allowed to start commercial functions in the
country during the mid 1990a and early 2000s respectively. The sector entered upon a financial
sector reform program in the1990s which primarily targeted at entrusting additional powers to
the central bank by strengthening efficacy of its instruments.

Phase-2:
This phase basically begun at the beginning of the present decade and was a multifaceted one.
Reform initiatives attempted to improve legal aspects, corporate governance, loan recovery,
exchange and interest rates management, NCB’s functions, risk management and efficiency of
the Bangladesh Bank. Measures were taken to strengthen the legal framework of the financial
sector, bring dynamism therein, extend autonomy to the central bank, combat money-
laundering offences and obtain decrees and executions against defaulters of loans. Better
disclosure and transparency standards have been introduced; fit and proper tests prescribed
for bank directors, Chief executives and advisors; restriction imposed on the composition of the

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Financial System in Bangladesh: Role in Development of the country.

membership of the board of directors; the roles and functions of the board and management
were clarified and redefined. Bangladesh Bank’s capacity to supervise and regulate bank
effectively, monitor non-performing loans and enforce actions against banks violating
regulations and laws has been strengthened. Audit committees (EWS) was introduced. To
strengthen the banking operation, minimum capital requirement was raised from Tk. 400
million to Tk. 1000 million and the requirement on risk weighted basis was also increased.

Tight loan rescheduling conditions were introduced to stop ever greening of loans. An upper
limit on a bank’s exposure to a particular customer or group was introduced. Strict measures
have been laid and enforced on loan loss provisioning. Loan write off guidelines were issued by
the Bangladesh Bank, allowing the banks for the first time, to write off “bad” debits against full
provisioning. Large loan limit has been linked to bank’s NPL ratio.

The Core Risk Management guidelines on five major risks has been introduced by Bangladesh
Bank (credit, foreign exchange and assets-liabilities risk management, internal control and
compliance and anti-money laundering) laying down policies, processes, procedures and
structures that will lead to better governance and improved services.

Presently, Bangladesh Bank has a market determined Exchange rate authority in the monetary
and exchange rate front. Floating of taka since June 2003 was achieved without encountering
undue volatility. Further reforms in simplifying and streamlining foreign exchange operations
and payment system are in the pipeline. To avoid private sector crowding out, the annual
volume of government borrowings from bank is limited and is now market based. Financial
instruments like repo, reverse repo, five year and ten year bonds have been introduced.
Bangladesh Bank and Securities exchange commission agreed to allow government bonds to be
traded in the stock exchange.

A capacity building program has been initiated in the Bangladesh Bank. Service standards and
work flow analysis have been introduced in different departments to ensure quality a speed.
The Central Bank Strengthening Program (CBSP) includes,

(a) Computerization of operations


(b) Human resource development
(c) Restructuring different departments
(d) Organizing business processes
(e) Automation of clearing house and
(f) Capacity building in the core activities

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Financial System in Bangladesh: Role in Development of the country.

Performance of Banks & Financial Institutions:

In Bangladesh, following independence, the banking sector was nationalized. The dominance of
these nationalized banks continued well until the late 1990s, even though gradually private
banks were allowed entry into the banking business. The combination of public ownership and
lack of competition contributed to not only weak performance of the banking sector measured
in terms of what is known as the CAMELS indicators, but very importantly, the banking sector
became a huge source of rent seeking and corruption. One key indicator of this is the volume of
non-performing loans (NPLs). For example, as of 2000, total NPL of the state-owned commercial
banks (SCBs) stood at a whopping 39 per cent of total loans (Taka 110 billion or 10 per cent of
GDP).

While some of the NPL reflected bad lending decisions, especially those given to weakly
performing public enterprises, a large part reflected the non-servicing of loans by politically
well-connected private business. This NPL ratio has come down recently based on reform
efforts while at the same time the lending share of the SCBs has been sharply cut back by
greater competition from private banks, yet the gross NPL of SCBs remains fairly large (24 per
cent or around taka billion 200 as of June 2009). In the private sector, NPLs for domestic private
banks fell from 22 per cent in 2000 to only 4.9 percent in June 2009.

Evidence shows that, due to the comprehensive reform programs launched in 2000, good
progress has been made in deregulating interest rates, strengthening prudential regulations,
enhancing the capacity of the central bank and allowing more competition through greater
entry of private banking enterprises. Less progress has been made in reforming state owned
banks (SCBs) and preparing them for privatization.

There has been a significant growth in banking deposits and credit relative to GDP, a sharp
increase in the private sector banking activities from a low base, interest rates now better
reflect market forces, and there has been significant improvement in the quality of banking
portfolio in terms of better capital adequacy ratios and lower share of NPLs. The performance
improvement is mostly concentrated in private banks, including domestic private banks. The
private banks now have a greater share of the banking deposits and loans than the public
banks. Their NPLs are substantially lower than found in public banks.

Private Banks also show stronger performance in terms of CAMELS indicators. Despite some
improvement, the quality of public banks remains of major concern. Evaluation of CAMELS
ratings suggests that the performance of most public banks is rated as marginal. When
compared internationally, despite the substantial progress over the past few years, the average
banking performance in Bangladesh is weaker than in other large South Asian countries of

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Financial System in Bangladesh: Role in Development of the country.

India, Pakistan and Sri Lanka. This performance ranks even more poorly when compared with
East Asian countries, particularly regarding banking portfolio quality and capital adequacy.

Financial institutions (FIs) represent one of the most important segments of financial system
and play very important role in mobilizing and channeling resources in Bangladesh. Non-Bank
Financial Institutions (NBFIs) in Bangladesh are gaining increased popularity in recent times.
Though the major business of most NBFIs is leasing some are also diversifying into other lines of
business like term lending, housing finance, merchant banking, equity financing and venture
capital financing. FIs numbering 29 as of December 2008 (starting from IPDC in 1981) are
regulated by the Financial Institutions Act, 1993 and the regulations made there under. In view
of their increased role in financing industry, trade and commerce, transport, information
technology, housing, etc. the minimum capital requirement of the FIs (expert one) have raised
their capital as total net assets. Total investments of FIs in different sectors up to 30 June 2009
were Taka 131.65 billion. Investment in capital market was Taka 8.26 billion. Since December
2000, classification of loan/lease and provisioning there against has been introduced for FIs like
the banking companies. As on 30 June 2009, total classified loan/lease stood at Taka 8.91 billion
or 7.22 percent of total loan/lease which shifted to 7.84 percent as of 30 September, 2009.

NBFIs of Bangladesh have already passed more than two and a half decades of operation.
Despite several constraints, the industry has performed notably well and their role in the
economy should be duly recognized. It is important to view NBFIs as a catalyst for economic
growth and to provide necessary support for their development. A long term approach by all
concerned for the development of NBFIs is necessary. Given appropriate support, NBFIs will be
able to play a more significant role in the economic development of the country.

Access to finance for Small & Medium Enterprises:

The growth of small and medium enterprises (SMEs) in terms of size and number has a
multiplier effect on the national economy, specifically on employment, GDP growth, and
poverty reduction in Bangladesh. There are nearly 1.5 billion SMEs in Bangladesh, 60%-65% of
which are located outside the metropolitan areas of Dhaka & Chittagong. There is a very high
density of SMEs in the industrial economy of Bangladesh. SMEs constitute over99% of private
industrial establishments and provide job opportunities to about 70%-80% of the non-
agricultural labor force. The SMEs share in manufacturing value added GDP varies at 28%-30%.
The service sector is primarily composed of SMEs, which is responsible for the bulk of
employment growth. SME contribution to national exports is significant through different
industries such as ready-made garments, jute, and leather.

In almost every part of the world, limited access to finance is considered a key constraint to
private sector growth. This is especially true for SMEs of our country as they are facing different
types of problems for availing institutional finance though SMEs play dominantly important role

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Financial System in Bangladesh: Role in Development of the country.

in the national economy of Bangladesh. Facing Problem in getting access to finance relates to
getting the right amount of fund at the right time at reasonable rates with suitable repayment
schedule and facing minimum bureaucratic hurdles. In this context, lack of capital has been
identified as the number one constraint to the development of SMEs in Bangladesh.

In general, SMEs are characterized by low capitalization, insufficient assets, and their inability to
fully comply with collateral requirements. On the supply side, administrative costs for banks
and financial institutions are high because of close monitoring and supervision required for SME
loans. The banks and financial institutions consider SME financing risky investments and charge
relatively high interest rates to cover portfolio risks. The procedures to get finance from the
banks and FIs is considered complex by most of the SMEs. The major constraints of SME banks
and FIs can be summarized as follows:

• Inadequate knowledge and ability to formulate proper project proposals for seeking
institutional finance.
• Collateral based lending procedures of banks and FIs that are not suitable for SMEs.
• Complex bureaucratic procedures and corruption.
• Limited availability of information on technical and marketing aspects of SMEs
• Inadequate and ineffective coordination among concerned government agencies
• Lack of a functional definition of SMEs that can characterize their unique positions
• Absence of proper criteria for selecting potential SME entrepreneurs by the promotional
institutions.

In the context of access to finance for SMEs, Bangladesh Bank has formulated and issued
prudential guidelines to be used by the banks and FIs in defining SMEs. Bangladesh Bank
introduced the refinance scheme for SMEs in May 2004 using three sources of funds: Tk. 100
million from Bangladesh Bank’s own resources, USD 20 million from IDA under the enterprise
Growth and Bank Modernization Project (EGBMP), and Taka 30 million from ADB. All scheduled
banks and FIs are eligible to avail this facility at Bank Rate subject to fulfilling the stipulated
conditions against their financing of SMEs. Under the Bangladesh Bank’s refinance scheme for
the small enterprise sector, any industry/business entity having a maximum total fixed
investment up to Tk. 10 million to banks and FIs up to August 2007 since the beginning of the
refinance scheme.

Bangladesh Bank has identified the following actions for SME development:

• Further extend refinancing facilities for SME finance;


• Introduce training for officials dealing with SME finance;
• Finding ways and means to minimize costs for managing SME finance;
• Establish risk fund or guarantee fund to cover risks;
• Develop SME data bank

An “entrepreneurs equity fund” has been established in 2000, which provides equity to SMEs in
agro-based industry and ICT sector through the commercial banks. As the prime public sector
institution for the promotion and development of small and cottage industries in the country,

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Financial System in Bangladesh: Role in Development of the country.

the Bangladesh Small and Cottage Industries Corporation (BSCIC) is involved in lending
programs from own resources; in association with the Bangladesh Shilpa Bank (BSB); and in
association with consortium of commercial banks.

Figure 2

The Bangladesh Small Industries and Commerce (BASIC) Bank Limited was set up in 1988 with
the objective of financing small and cottage industries and it is envisaged that at least 50% of its

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Financial System in Bangladesh: Role in Development of the country.

loan able fund should be invested in small scale industries. The bank offers lower lending rates
on SMEs compared with other banks. At present, the development of the SME sector is
increasingly promoted through the involvement of private agencies, such as MIDAS. This
organization has a successful record in facilitating the development of small scale industries by
way of building up innovative models of small scale and micro enterprises, which are
subsequently replicated by other entrepreneurs or institutions. MIDAS has recently increased
its lending limit for SMIs from Tk. 30 million to Tk. 100 million to match with the government’s
new industrial policy.

Suggested measures to improve performance of banks and financial


institutions:

1. Restructure, Corporatize & Privatize:


a) Nationalised Commercial Banks (NCBs): Sonali Bank, Janata Bank and Agrani
Bank have been corporatised and incorporatied as public limited company. Sale
of Rupali Bank to a foreign private entrepreneur is underway. These banks will
be more accountable to the central bank.
b) Specialised Banks (SBs): Public sector banks in charge of agricultural and
industrial term lending suffer from poor decision making and low efficiency. In
order to make them efficient and financially viable, restructuring of these
institutions is necessary. Otherwise, it will hinder the overall financial sector
stability and soundness
2. Non-bank financial institution (NBFIs): Non-bank financial institution (NBFIs) play a
significant role in meeting the diverse financial needs of various sectors of an economy
as well as to the deepening of the country’s financial system. At present, almost all
private commercial banks are involved in non-bank financial operations. Banks wishing
to enter in the leasing business, which is essentially a core operation of NBFIs, can do so
through opening subsidiaries so that a level playing field for NBFIs can be maintained.
Alternatively, banks can go for joint financing under syndication arrangements with
leasing companies on any project proposal. Again, banks can concentrate on working
capital finance and foreign exchange operations, which matches more with their asset-
liability management. Long term investment like financing capital machineries can be
done by NBFIs and in the event when banks want to engage in such activities they can
place their funds with an NBFI to extend lease facility for those machineries. The success
of merchant banking operations is largely linked to the development of the security
market. So NBFIs should concentrate more on their opportunities in the capital market.

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Financial System in Bangladesh: Role in Development of the country.

3. NGO-MFIs : Microcredit Regulatory Authority should consider the following steps:


• The NGO-MFIs may be required by law to disburse a certain percentage of their
loan to agriculture, small, medium and micro enterprises.
• The authority can also replicate the wholesale lending approach which is now
being executed by PKSF for microcredit purpose, to reach the farmers, SME and
micro entrepreneurs.
• Equal access to the services under consideration in terms of geographic location
should be ensured by giving license to NGO-MFIs in such a way that every
geographic location be covered by NGO-MFIs with equal intensity.
• A restructuring of regulatory framework, i. e. Microcredit Regulatory Authority
Act (MRAA) may take up measures to introduce simple and conducive regulatory
regime for the MFIs.
4. Capital Market: Capital market, comprising of debt and equity instruments, can play a
key role in economic development by channeling surplus resources to the most
productive uses. Though the stock market in our country started its operation some 50
years ago, the contribution of the capital market towards economic growth in a
significant way is yet to make its mark. The capital market is still having low level of
capitalization, liquidity and depth; it lacks active trading in fixed income securities (bond
and debentures). Following steps can be adopted to develop the capital market of
Bangladesh,
To raise the market capitalization,
5. Bond Market: Presently, Bangladeshi Bond Market is not in a good shape. Investors
across the world are using different sources for raising their funds. They may also
explore the possibilities of funds like insurance of commercial paper, certificates of
deposits and other money and capital market instruments. Further steps like developing
benchmark yield curve is also needed in order to ensure the proper development of the
bond market. Although a recent decision of the government to introduced pre-
announced volume based auctions will definitely bring more transparency in the
country’s money market and avoid mismatch between cash and debt management.
Recently the Cash and Debt Management (CDMC) has agreed in principle that from the
beginning of FY08 the development system will be replaced by a system where the extra
amount will be developed on the primary dealers on the basis of underwriting. This new
system will enthuse the primary dealers to create a secondary market for government
securities.
6. Insurance: Insurance industry is an integral part of the financial system. In our country
both insurance penetration and insurance density is comparatively lower in comparison
to other south Asian countries. Its development and efficient functioning is crucially
linked to the growth and stability of the financial system. Lack of competence from the

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Financial System in Bangladesh: Role in Development of the country.

regulator’s side can lead to an unstable industry, with a latent threat to overall financial
system. The present regulatory and supervisory mechanism of the industry remains
underdeveloped to manage a sizeable number of companies in the industry. Lack of
proper monitoring mechanism, experienced staff and inadequate technological support
are some of the key problems of the present regulatory body, limiting its role in the
development of the sector. Considering the role of this industry’s growth and stability
for the entire financial market the present regulatory body need to be connected with
the other regulators (such as BB, SEC). Such a development can significantly improve the
efficacy of the regulatory mechanism by adopting coherent and mutually beneficial
programs and policies. Insurance industry is one of the major institutional investors of
the capital market. They can play a vital role in capital market development by investing
large amount of fund for long term. As institutional investors they are more informed
about the company fundamentals, thereby increase informational efficiency of the
capital market.
7. Creating Public-private Partnership for Infrastructure Finance: Public-private partnership
(PPP) describes a government service or private business venture which is funded and
operated through a partnership of government and one or more private sector
companies. Investment Climate Assessment (ICA) by the World Bank and Bangladesh
Enterprise Institute (WB and BEI, 2003) shows that poor infrastructure is one of the
major obstacles for private sector development in Bangladesh. Lack of efficiency in
public sector services has imposed significant costs and hindered the growth of the
country’s economy. Already government has taken several steps. More steps should be
taken to strengthen the infrastructural condition and to remove the private sector lacks.
8. Autonomy of Bangladesh Bank: Former Governor of Bangladesh Bank Dr Salehuddin
Ahmed stressed the need for full autonomy of BB for smooth functioning of the banking
sector. He said, “Bangladesh Bank does not enjoy full autonomy like the other central
banks in the world.” H also says that, “Obviously, full autonomy does not mean lack of
accountability—there must be a process to make us accountable.”
9. Compliance of Basel II: Banks operating in Bangladesh are maintaining Risk Based Capital
(Basel I) instead of capital-to-liabilities approach from 1996. According to Basel I banks
are maintaining Minimum Capital Requirement (MCR) on the basis of Risk-Weighted
Asset (RWA) and Risk Weights were fixed i.e. 0%, 20%, 50%, & 100%. But this ‘one size
fits to all’ approach nowadays lost its acceptability. To make the bank capital more risk
sensitive and more shock absorbent Bangladesh Bank (BB) decided to introduce Basel II.
In order to make the banks prepared Bangladesh Bank (BB) started parallel run of Basel I
& Basel II for one year from January 01, 2009 and has formally introduced Basel II rules
titled Risk Based Capital Adequacy (RBCA) for banks (Revised Regulatory Capital
framework in line with Basel II) from January 2010. As in many other developing

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Financial System in Bangladesh: Role in Development of the country.

countries, implementation of Basel II is a challenging issue for banking sector of


Bangladesh. Compliance of Basel Core Principles (BCPs) requires providing a solid
foundation for the eventual implementation of the new accord. As an initial strategic
move, a survey has been conducted to understand the choices of banks for adopting
different approaches of risk measurements for regulatory capital requirement. The
study shows that most of the banks in Bangladesh like to follow simplified standardized
approach for credit risk, basic indicator approach for operational risk and standardized
approach for market risk.

Concluding remarks:

Today, almost everyone agrees that the financial system is essential for development of a
country. Improving the financial system can lead to higher growth and reduce the likelihood
and severity of crises. While Bangladesh has achieved relatively high economic growth over the
past years with a distorted financial system and in spite of its governance problems, cross-
country experience has shown the importance of financial and institutional development to
sustain long-term economic growth. Faster GDP growth consistent with the poverty reduction
goals cannot be met unless the extent and quality of financial intermediation in Bangladesh
advances significantly. In particular, this would require more competitive banking and non-
banking financial sectors capable of reaching out to all sections of the community, rural &
urban, catering to all types of marketable financial service. The pro-active measures taken in
the financial sector in recent years have put salutary impact on the financial system. Hopefully,
the on-going reform process in the financial system of Bangladesh will bring more stability and
transparency. In this regard, proper care should be taken in the reform process so that reforms
in the financial sector embrace the socio- economic realities in Bangladesh.

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Financial System in Bangladesh: Role in Development of the country.

Bibliography:

• Bangladesh Bank’s website and its various publications: http://www.bangladesh-


bank.org/, www.bangladesh-bank.org/pub/annual/anreport/ar0405/chap5.pdf
• Financial Sector Reforms in Bangladesh: The Next Round – Debapriya Bhattacharya,
Toufic A Chowdhury: http://www.cpd-bangladesh.org/publications/op/op22.pdf
• The Financial Express website: http://www.thefinancialexpress-
bd.com/more.php?news_id=90159
• Small and Medium Enterprise Foundation’s website: www.smef.org.bd/
• “Financial Sector Reforms Task force report” - Dr. Wahid Uddin Mahmud (Chairman),
Mr. Khondoker Ibrahim Khaled (Co-Chairman), Dr. Toufic Ahmad Choudhury (Member
Secretary), Mr. Shah Md. Nurul Alam, Mr. C. M. Koyes Sami (Member), Mr. Mohammed
Hossain (Member)
• “The Road Map to Financial System Standards for Middle Income Bangladesh” – Dr.
Salehudden Ahmed, former Governer, Bangladesh Bank.
• “Performance evaluation of SMEs of Bangladesh” – Kashfia Ahmed & Tanvir Ahmed
chowdhury.

Mohammad Motaher Hossain (ST. ID: 1010349060) Page 16 of 16