Financial Sector Reform in Bangladesh - An Evaluation
-
ABDUR RAQUIB∗
Abstract
The Financial Sector Reform is a continuous process. It comprises policy reforms and basic
institutional changes in the status and their respective goals. The speed and pace of changes
in both ways depend on the socio-political demand of the economy as well as to meet the
needs of changed market situation. The financial reform process in our economy started since
early 80s with privatization of NCBs and allowing private sector banks and major changes
have been brought about in policy areas with our own initiative and also under the
surveillance and supervisory guidance of IMF and World Bank. In following the prescription
of IMF/ World Bank, ADB and other multinational doner agencies, we should be aware that
there is no universally acceptable model of reforms. Reform measures should be country
specific tailored to the socio-economic needs. Simultaneous integrated approach should be
taken to redress the economic ills and to derive benefit from the globalization and free market
approach. The scattered uncommitted and half-hearted reforms are fraught with risk of
destabilizing the economy.
I. Introduction
The financial system of an economy provides the medium of exchange, allocates resources,
provides a return on and affects the level of savings. It also pools, transforms and distributes
risks as an important locus of implementation of development policy of a country. Real
economic growth goes hand in hand with an increasing amount and diversity of activity of
financial institutions, market and instruments. Thc financial structure is composed of two sets
of elements; namely, financial instruments and financial institutions. In the context of
Bangladesh, an efficient and developed financial system is essential for transferring capital
from savers to investors and to channelise scarce resources to maximize production,
”Financial Market can be thought of as the brain of the entire economic system, the central
locus of decision making”, (Stiglitz, 1994 p. 23). In fact, the financial system’s contribution
to growth lies precisely in its ability to increase efficiency in financial deepening through
∗
The author is Deputy Executive President, Islami Bank Bangladesh Ltd.. The views expressed in the article
are author's own.
1
viable and effective financial market and financial instruments and profitable interaction with
the progressive globalisation.
II. Characteristics of Financial Sector in Bangladesh
Before liberation of Bangladesh, the banking and finance industries in erstwhile East Pakistan
was owned and controlled by erstwhile West Pakistani owners. Bangladesh inherited a
narrow and thin financial sector with six commercial banks which were nationalised, a few
foreign banks and two Govt. owned specialised financial institutions. The banking system
was operating until the end of 1980s with the directives of monetary authorities aiming at
achieving objectives of supplying cheap money to the State Owned Enterprises (SOEs) and
priority sector like Agriculture, Export and Small and Cottage Industries in the private sector.
The two important instruments at the armoury of monetary authority to execute monetary
policy was selective credit control measures and administered interest rate. One consequence
of Central Bank’s regulated deposit and lending rates at that time without consideration of
market clearing rate was that in real terms, interest rates appeared to be negative in view of
high rates of inflation during the mid 70s and upto the end of 1980s. The policy of arbitrarily
fixed low interest rate brought about undesirable consequences of distortion in allocation of
resources between different sectors. Consequently, the financial interrelations ratio
(Goldsmith, 1969) measured in terms of ratio of total financial assets to National Wealth
remained abysmally low in Bangladesh ranging between 10%-20% between 1973-1983
compared to 40% - 65% in Pakistan, India, Sri Lanka, Thailand, Philippines and Malaysia
(IMF Financial Statistics, 1980 - 1984).
III. Need for Financial Sector Reform
During the decade upto mid 1980, the banking sector was characterised by a ”financially
repressed” regime scenario of low interest rate, distortion in resource allocation, low rate of
savings leading to financial disintermediation and the financial sector was being used to
service the need of the Govt. sector and a few business houses with concomitant consequence
of shallow financial system. The demand management aspect of macro economic variables
was not taken care of. The loanable fund at the disposal of the banks were disbursed mostly
in publicly directed sectors without commercial consideration. The internal control system of
commercial banks was weak, the books of accounts did never reflect the actual financial
health of the banks, the quality of assets of the banks was never evaluated on strict
accounting principles, the MIS was virtually non-existent in the banking sector, profitability
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and liquidity aspect of portfolio management was unfamiliar concept among the management
personnel, the elements of capital adequacy for banking operation were never given due
weightage. The pervasive weakness in the money market was observed in the capital market
also. The only stock exchange of the country, namely the Dhaka Stock Exchange was almost
inoperative with only a few enlisted companies. Bangladesh Shilpa Bank (BSB) &
Bangladesh Shilpa Rin Shangastha (BSRS) were financing projects out of loans from IDA,
ADB credit lines to projects which were hardly appraised from the point of view of cost
benefit analysis. Cumulative effect of mismanagement in money and capital market led to
huge accumulation of non-performing loans for our financial sector which has risen to about
40% - 42% of the total advances of our banking sector in recent period. The total scenario of
financial sectors was in a state of disarray. Hence the need for overhauling of the financial
sector was felt and in order to bring about structural, institutional and policy changes in the
fragile financial sector, a National Commission of Money, Banking and Credit was
constituted in 1984.
The Commission submitted report to the Govt. in 1986 identifying the problem areas in our
financial sector with specific recommendations to bring about the structural, institutional,
policy and legal reforms. Accordingly, the Financial Sector Reforms Project (FSRP) was
launched in 1990 under Financial Sector Adjustment Credit of IDA the 1st phase of which
was completed in June, 1996. The financial sector reform has become a continuous process
which is being carried out in its second phase under the style of commercial banks
restructuring project. Moreover, like almost every country of Asia, Bangladesh has
committed to introduce market forces into its financial system - but slowly, so as not to make
bankrupt borrowers, destabilise lenders, displace workers or otherwise upset the established
order of things. The crises of 1997 which began in the foreign exchange market and spread
quickly through the banking sector of most of the Asian countries challenged the slow
moving style of reform. As such although Bangladesh has not been directly affected by the
recent financial turmoil of Asian tigers, yet the financial reform heads the agenda of the
present Government. Accordingly the Government has constituted a Bank Reform
Committee with an eminent economist of the country as chairman, alongwith experienced
professional bankers as members including the Governor of Bangladesh Bank to make
pragmatic recommendations to overhaul and strengthen the fragile financial sector of the
country.
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IV. Chronology of Reform Measures
4.1 Institutional Reforms
a.
Privatization of Banks
One of the important objectives of the FSRP was opening up of financial sector for private
banks. This policy has been aimed at bringing about efficiency through competition in the
banking sector and gradual privatisation of the 4 NCBs which still hold 60% of the total bank
deposits. At present our banking sector has accommodated 17 private banks including 4
Islamic Banks and 13 foreign banks in addition to 4 nationalized banks and 5 specialized
banks. Under the present policy of liberalization, scope exists for operation of more
indigenous private sector banks and foreign owned banks keeping a very cautious watch over
the overall performance of the economy in the years to come. With operation of 39 banks
having about 6000 branches all over the country, banking services have been brought nearer
to people. Money market has been expanded and with gradual computerisation and electronic
banking customers services have been improved due to the increasing competition among
banks. Although it cannot be ascertained about the direct impact of institutional reform on the
deposit growth of the banking system but it can be observed from the time series data of
deposit growth as shown in Table 1, that there is clear shifting of deposit from the NCBs to
private sector banks. The rate of growth of deposit in the private sector banks is higher than
that of NCBs although the number of branches and manpower employed in NCBs are much
higher than those of the private sector banks. The total number of branches of NCBs and the
total employees are 3617 and 64037 respectively. Whereas, the total number of branches of
private commercial banks and their total number of employees are 1,108 and 22,218
respectively. Comparative position of deposit per branch and deposit per employee of private
banks (12.48 crores, 0.62 crores as against 8.72 crores and 0.49 crores of NCBs) are much
higher than those of NCBs, which indicates their relatively higher efficiency in deposit
mobilisation and providing better services to customers. But it is to be noted here that the
private sector banks have no obligation to extend their operation in the rural areas and to do
social mass banking which were the main objective of nationalised commercial banks. The
NCBs’ functions are concentrated more on retail banking and to cater to the credit needs of
SOEs, whereas the private sector banks’ operation are concentrated in the urban commercial
centers mainly dealing with corporate wholesale banking.
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b. Liberalization of Interest Rate
A major policy change introduced in a key policy variable was in the area of interest rate
policy. In place of arbitrarily fixed interest rate, Bangladesh Bank introduced a flexible
market oriented interest rate structure from January 1990. It also abolished sector specific
concessional refinance facility. Interest rate bands were prescribed for different categories of
loans and advances and deposits within which banks were at liberty to determine their
respective rates. Lending rate bands were determined on the basis of shadow lending rates
and deposit rate bands were determined taking into consideration the expected rate of
inflation and a positive real return for savers. Interest rate bands were abolished except for
export, agriculture and small & cottage industries. Banks have their discretion to charge
differential rates of interest on the basis of risks attached to borrowers and also on term loans
on the basis of maturity period. At present, banks are free to fix up their deposit rates on the
basis of market forces.
Impact
No study has been made to assess the impact of policy reform in the area of interest rate,
discontinuation of directed lending for market friendly lending policies by banks and
deregulation of credit control by prudential regulations by the Central Bank, on the banking
operation of the country particularly on the growth of deposits, bank advances, qualitative
improvement in lending and loan recovery. But it can be observed with the backing of the
cross section data that there have been change in the pattern of sectoral lending by the banks
and more transparency and accountability have been introduced regarding the health and
soundness of the banks. If we look at the sectoral credit flow of the banking system for the
last 3 years, as shown in Table 2, it can be observed that the credit to the agriculture, export
and small and cottage industries stagnated and has been declining while credit flow to
commercial sector have been increasing significantly. This indicates that the banks are
becoming more and more commercially profit and market oriented. To ensure the balanced
flow of credit among the sectors the existing concessional interest band for agriculture,
export, small and cottage industries should be abolished. Free market forces should be
allowed in pricing the credit to reap the benefit of reforms both by the borrowers in terms of
increased flow of credit as well as by the credit institutions to be self sustainable.
It may be noted here that the financial sector reform measures have adversely affected the
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rural deposit mobilisation and rural credit flow from the conventional Government owned
institutional sources, but their dormant inefficient and ineffective role facilitated the growth
of innovative rural credit institutions like Grameen Bank, BRAC, PROSHIKA, ASA, AnsarVDP Bank, Swanirvar Program, PKSF and its hundreds of partners organisations, i.e. NGOs.
Grameen Bank along with its 1106 grass root village branches has outstanding credit
disbursement of Tk. 8514.01 crores among its 23 million borrowers. 95% of them are women
in 38173 villages. It has also outstanding rural housing loans to the tune of Tk. 635.98 crores.
Its total loan constitutes 18% of total bank loans and advances in the country. Although it has
not yet fully started deposit banking, but it has accumulated savings in the group fund to the
tune of Tk. 680.20 crores. It is also using the money market to borrow fund from the
commercial banks through sale of Grameen Bond for its poverty focussed group based
lending. As an alternative sources of rural credit Grameen Bank along with BRAC and other
NGOs is playing important role as an appropriate rural credit institution. The concern has
been raised now for developing a regulatory framework for the deposit taking NGOs to
ensure their accountability regarding safety of their depositors and savers. A study is
underway to design a regulatory framework for the NGOs and Micro credit Financial
Institutions ( MFIs).
c. Creation of Credit Information Bureau (CIB) and Its Impact
To restore and strengthen the credit discipline and to provide adequate reliable credit
information among banks to facilitate loan santioning, a Credit Information Bureau (CIB) has
been created in Bangladesh Bank in December, 1992 and its operation started from 1993.
The main objectives of CIB are as follows:
(a) To collect all credit information of the borrowers having outstanding loan of Tk. 10.00
lacs and above from all the banks and non-banking financial institutions.
(b) To provide credit information to all banks and financial institutions to facilitate loan
sanctioning, renewal and rescheduling from the computer data base.
(c) To prepare credit reports for using the Government and international financial institution
and to provide relevant data on bank credit for research and studies.
(d) To prepare and provide Credit Risk Rating of the borrowers to banks.
The CIB is an important land mark in the banking sector reform process in the country
and as a data bank for bank credit is contributing significantly in quickening loan processing
and decision making in loan approvals. CIB also has a meaningful impact on banks
6
regulation and supervision by the Central Bank in various ways, like approving new banks,
and branches, sectoral credit planning, etc.
d. New Loan - Classification Guideline
Before introducing updated loan classification guidelines in 1989 by Bangladesh Bank, the
commercial banks did not follow any norm to classify their bad and non-performing loans.
Banks did not keep provision for their poor quality assets. Hence there was huge provision
short-fall and capital inadequacy of NCBs took a serious shape for which Govt. came forward
by issuing bonds to salvage the NCBs. As on 30 June ’97 NCBs had actual capital of 1306
crore with a shortfall of 524.39 crore. The private sector banks as on 30/06/97 had a shortfall
of 79.37 crore. As far as classified loan is concerned, as on 31/12/97 NCBs had 29.85% of
their loans classified as against 23.02% for private banks’ and the required provision was
4058.97 crore as against actual provision 1836.51 crore with a shortfall of 2222.46 crore. The
corresponding figure of private banks’ requirements was 1885.23 crore against which they
maintained 980.97 crore leaving shortfall of 909.00 crore. Bangladesh Bank is constantly
monitoring the bank’s performance and improvement on the issue of provision and capital
shortfall. Things are having a positive direction due to strict regulation & close supervision.
The NCBs and PCBs are being advised to write off the loans and advances without any
security which have remained as bad / loss classified for atleast six years and all efforts were
failed to recover. Now the loan classification criteria has been made more stringent whereby
banks have to classify any loan being overdue for more than 3 months as substandard, 6
months overdue as doubtful and 1 year overdue as bad /loss. Accordingly provision
requirement have also been raised to 15% for substandard, 50% for doubtful and 100% for
bad/loss. The criteria also fulfill the international standard regarding loan classification as
formulated by Bank for International Settlement.
e. Capital Adequacy Requirement
Before introduction of FSRP our banking sector was unconcerned about Minimum Capital
Requirement. Although it was mandatory under section 13(2) of the Bank Companies Act,
1991 to provide 6% of total demand and time liabilities as capital, very few of our banks
could fulfill the condition. Almost all the banks were under capitalized and because of
provision shortfall and deteriorating condition of asset quality, further erosion of capital was
faced by the banking sector. Hence in order to safeguard the interest of depositors and bring
about a universally accepted status of our banking sector, risk weighted capital adequacy
7
requirement has been introduced from January 1996 and it is now mandatory for the banks to
maintain 8% of the assets in risk weighted manner since 1996. Banks are strictly advised to
maintain the adequacy element of capital and Bangladesh Bank is constantly monitoring the
status of commercial banks in this regard.
f. On-site and Off-site Supervision
Under FSRP, major change has been made in the on-site and off-site inspection area of
Bangladesh Bank. Evaluation of performances of banks are being made through ”CAMEL
RATING”. The CAMEL RATING system is based ’upon an evaluation of 5 crucial
dimensions that are to be evaluated are Capital Adequacy, Asset Quality, Management,
Earnings & Liquidity. Each of these dimensions is to be rated on a scale of 1 through 5 in
ascending order of performance deficiency. Thus, ’1’ represents the highest, ’5’ the lowest
level of operating performance. Problem banks are identified based on the acuteness of the
problems indicated by these ratings. At present 7 banks are identified as problem bank and a
Problem Bank Monitoring Department has been opened to look into the problem banks more
closely. More coordinated efforts are made constantly and among different departments
relating to bank supervision. Large loan review cell and early warning system have been
introduced in Bangladesh Bank as a part of prudential supervision.
Finally, restructuring of commercial banks by improving the accounting system, internal
control, human resource development, improvement to professional issue is another area
looked after by FSRP.
4.2 Legal Reforms
a)
Banking Companies were being guided under Bank Companies Ordinance, 1962 of
erstwhile Pakistan which became outdated to cater to the needs of private banks &
NCBs in changed circumstances. It was replaced by Bank Companies Act, 1991 which
provides with wide range of power to Bangladesh Bank to deal with banking sectors’
monitoring, regulation and supervision.
b)
The Financial Institutions Act, 1993 was formulated to deal with the affairs of NonBanking Financial Institutions (NBFIs). As per provision of this Act, cautious approach
is taken to issue licence for new NBFIs and monitoring and supervision of the existing
NBFIs are being made to ensure their sound operation.
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c)
The Bankruptcy Act was enacted in 1997 and 2 Bankruptcy Courts have been set up in
the commercial areas of Dhaka and Chittagong and will be in operation within a month
to deal with delinquent big defaulters. Adequate number of financial loan courts have
also been created to deal exclusively with bank loan defaulters.
d)
Further amendments to Bank Companies Act, 1991 and Bangladesh Bank Order, 1972
are under process to suit the latest financial sector scenario in the country and to bring
about reform in the status, powers and functional operations of the Central Bank. It is
expected that the recommendations of the BRC and Commercial Bank Restructuring
Project to strengthen Bangladesh Bank, with more autonomy and independence for
effective monetary policy and bank supervision will be adhered to.
4.3 Development of Bond Market
Bangladesh Bank has now engaged itself in the open market operation very actively and has
introduced its own securities, such as 90-days Bangladesh Bank Bill since 1990. Later on 30days Bangladesh Bank Bill has also been introduced in 1995 alongwith 90 days, 180 days
and one year maturity Treasury Bills with active participation by commercial banks. Auction
is now held every week.
Impact of Government Borrowing from Bangladesh Bank & the Banking System
Government Borrowing from Bangladesh Bank and Commercial Banks have certain impact
on the monetary aggregate of the economy. Borrowing from Bangladesh Bank leads to
expansion in the monetary aggregate via high powered money injection in the money supply
and borrowing from banking system leads to contraction of credit to private sector and thus a
”crowding out effect” on the private sector investment opportunity pervades in the economy
leading to depressing condition in the economy. Hence, the open market operation as a tool
of monetary policy in the hands of Bangladesh Bank is being handled with utmost caution
keeping in view the monetary policy of the country. Bangladesh Bank through Monetary
Management and Technical Unit constantly monitors the market behavior and reaction of
open market operations. The impact of the weekly auction with the new products i.e. bills and
securities has helped broaden the scope of borrowing by the Govt. at market rate from the
open market, instead of depending on Central Bank only which leads to high powered money
creation. It also provides market for short term investment by the banks & NBFIs with their
excess liquidity.
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4.4 Reform in Foreign Exchange Area
Bangladesh follows a managed float type of exchange rate arrangement under which
Bangladesh Bank, rather than the market sets the exchange rate. The rate is, however, varied
frequently. Several judgmental factors which include a target Real Effective Exchange Rate
(REER), foreign reserves and movements in the balance of payments are used to set and
adjust the rate. The dominant factor is indeed the REER, under which efforts are made to
stabilize the value of Taka against an average of key trading partner countries’ currencies.
Banks are free to determine their own rates of US $ and the cross rates of all other currencies.
Banks give forward cover for their own foreign exchange transactions. An important
landmark in the exchange rate regime has been the convertibility of Taka for all Current
Account transactions from March 24, 1994. Phasing away of exchange restrictions gained
momentum in the ’90s. The official and secondary exchange market rates were unified at the
end of 91. Major relaxations in exchange control area included waiver of Bangladesh Bank’s
prior permission for routine current transactions such as foreign exchange for visits abroad,
treatment, education, interest and principal payment on loans, remittance of profits,
dividends, royalties. Requirement of surrender of foreign exchange by residents was relaxed
allowing partial retention by exporters and other earners. The reforms / liberalizations
attained progress far enough by early 94 to enable acceptance of IMF Article VIII obligations
for full convertibility of Bangladesh Taka in the Current Account. Foreigner may now take
out any amount of Foreign Exchange brought into Bangladesh through banking channel.
They have also been allowed to make investments in the capital market including
subscription in primary shares and to freely repatriate investment income alongwith capital
invested. By introducing convertibility of Taka for Current Account transactions, Bangladesh
has opened its external account transactions by ensuring easy access to foreign exchange.
The allowing of the operation about 400 money changers or exchange houses all over the
country to deal with buying & selling foreign exchange in addition to the Authorised Foreign
Exchange Dealers further facilitated the foreign exchange availability through the informal
Foreign Exchange Market.
Consequence of Liberalization
The liberalization measures culminating in current account convertibility of Taka have
resulted in rapid expansion of external sector of our economy. Both exports and imports have
grown substantially. The Foreign Exchange Reserve are now much higher than average levels
10
in the 80s even after recent downward trend which was Tk. 452 crore in 80-81 and Tk. 7485
crore in 96-97 period. The interbank foreign exchange market has grown remarkably with all
transactions other than those relating to official foreign debt settled through this market.
Bangladesh Foreign Exchange Dealers Association (BAFEDA) has already developed a code
of conduct for orderly market operations.
4.5 Capital Market Development
The Capital Market of Bangladesh is still in a rudimentary stage. The Investment Corporation
of Bangladesh (ICB) and Dhaka Stock Exchange (DSE) are playing active role in the capital
market. The ICB nourishes the equity segment while DSE provides opportunity for trading in
shares & equities. A number of reforms have been adopted to promote growth of capital
market. These include fiscal incentives, regulative controls, updating and rationalization of
Securities & Exchange Commission (SEC) and establishment of SEC as a statutory
regulatory body. Moreover, capital gains from banks share has been made tax free. The ratio
of loan from ICB has been raised from 1:2 to 1:3. More liberal policies have been put forward
to issue licenses to new merchant banks and so far 18 licenses have been issued by NBFI
department. An allocation of 5% of new IPO has been earmarked for non-resident
Bangladeshi investors. Banks can finance loans against share / debentures to the extent of
60% of average market value of preceding 6 months following the banker-customer
relationship and other banking norms as per prudential guidelines issued by Bangladesh
Bank. But the Stock Exchange has yet to regain shape from the collapse happened due to
speculative bubble during November, 1996. The continuous bearish tendency and the
declining price index has shaken the confidence of the investors in the share market. As a
result the prospect of the growth of capital market to meet the capital needs of the industrial
development through attracting both domestic and foreign portfolio investors seems to be
nipped in the bud. The lack of expertise and professionalism in the SEC to regulate and
promote the Stock Market opened the opportunity to the market players to manipulate and
exploit the emerging market to make windfall gain.
The capital market reforms and the liberalisation of exchange control regime to attract
foreign investment in the market friendly environment of the economy could hardly make
any mark in the flow of foreign direct and portfolio investment. The position of non-residents
investment in the share market in the last six fiscal years including the current fiscal year upto
January 98, indicates that the short term hot money investments by the foreigners were made
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only to make quick profit by exploiting the disorganized and manipulated Stock Market and
remitted the huge capital gains, windfall profit including their invested fund. The outflow on
account of portfolio investment was much higher than the inflow. The inflow of FDI in the
country showed a very marginal increase during the last three years (Table 3 & 4). It appears
that the reforms in the area of capital market and liberalisation in repatriation facilities have
become counter productive. It may also suggests that safe investment resort has not yet been
created in the country for foreign investors. Mere financial and fiscal reform are not enough
to attract and retain foreign capital in the country. Appropriate legal socio political safety and
good governance are essential to create confidence for foreign investors.
4.6 Reforms in Fiscal Policy
Increased domestic resource mobilization is one of the important fiscal policy objective of the
Govt. in order to reduce overall deficit in the budget and to attain GDP growth rate of at least
7% and increase in the rate of investment to around 18%-20% within year 2000. While public
savings would involve increased revenue earning private saving would involve saving of
corporate & household sector. Under fiscal reforms, the objective was to strengthen and
streamline revenue by broadening tax base, rationalizing tax structure and improving tax
administration. Broad target is to raise the Revenue GDP ratio by 1.5% by 1997-98 and by
another 2% over the medium term which increased from 5.2 during 1974-75 to 11.5 during
1993-94.
In order to achieve the above objectives, the NBR has taken steps to broaden tax base by
making textile and cottage industries and trade & power sector subject to VAT and by way of
restricting granting of new tax holidays. By 2000, NBR and concerned authorities would aim
at obviating the need for tax holidays by lowering and unifying corporate tax rates and
revamping tax administrations of NBR. NBR would also establish Tax Recovery Units for
both VAT and income tax at circle offices to ensure collection arrears. In addition to different
measures of improving revenue collection, the important source of surplus resource
generation is to rationalize and reduce current Govt. expenditure.
V.
Conclusion
Financial Sector Reform Project is the result of Structural Adjustment Facility (SAF) and
Enhanced Structural Adjustment Facility (ESAF) conditionality of IMF. Throughout the
whole FSRP regime, World Bank & IMF came forward with many suggestions to bring about
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a qualitative change in our financial sector as far as policy reforms, legal reforms are
concerned. We have seen much changes during last few years. But a neutral observation will
reveal that because of psychological rigidity to accept anything new, the speed of adaptability
to reforms was much slower than expected. The restructuring of some of NCBs were,
although initially included in the agenda, subsequently received less or slower attention. The
case of privatization of Rupali Bank is a case in point. Although most of the works were
completed, the process of implementation has remained standstill during last few years. But
the continuous increase in number of new private sector banks with rapid expansion of their
branch network on the one hand and limiting the further expansion of the NCBs, on the other
is quite in line with the public banking policy objectives of the Govt. to promote free market
oriented competitive, sound and effective banking system in the country. But the performance
of the private sector banks as a whole are not upto the expectation in terms of quality of
lending, non performing loans, loan classification status, and overall management, as to
create greater confidence among the customers, although they offer better and quick services
to the customers. As a result the private sector banks have yet to capture major market share
in the banking sector.
As revealed from the discussion on impact of policy reforms, in the area of interest rate
structure, monetary policy, bank regulation and supervision, substantial headway has been
made in establishing a market determined interest rate system in deposits banking and
lending operation, activation of money market and foreign exchange market with least
intervention of Central Bank. But the benefits of the market rate of interest are yet to accrue
to the depositors and the new borrowers due to the overhang of huge non-performing loans
with the banks. As the bad debt provision cost is still heavy the spread between deposit rate
and lending rate is much high about 6% to 7%. In the area of bank regulation and
supervision, the impact of adoption of uptodate modern supervisory techniques both in offsite and on-site area and close monitoring of the problem banks by Bangladesh Bank have
arrested further deterioration in overdue and classified loan position of banks. With operation
of Task Force of each bank including Bangladesh Bank for recovery drive, the loan recovery
position and quality of new lending are improving. A reform should have been made first to
have a strong autonomous and independent Central Bank for a sound effective financial
sector.
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A major improvement is, however, worth mentioning in respect of current account
convertibility but on the other hand, quick opening up of our economy without being
prepared for facing international competition has given rise to scepticism among
development think-tanks of the country regarding the choice of appropriate technology for
long run development. Ours is a small open economy with limited scope of influencing the
world market in the trade sector with little comparative advantage and competitiveness to
excel in outward oriented strategy. So, ’rational intervention’ strategy in the open market
atmosphere may be considered more expedient & pragmatic approach for a sustainable
growth strategy. The conditionality of Capital Account Convertibility for our exchange
regime should be reviewed thoroughly in the light of recent financial crisis of East Asian
Tiger Countries. In swallowing pills prescribed by IMF / World Bank, we should remember
that there is no universally acceptable ’model’ of reforms. It should be country-specific
suitable for a country’s overall socio-economic conditions and an integrated approach should
be taken to redress economic ills. A scattered, uncommitted and half- hearted policy is
fraught with risk of destabilizing the economy. While considering reforms recommendations
we should remember that the reform measures themselves should not be self-defeating.
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Government of Bangladesh (GOB). Periodical Reports of the Financial Sector Reform
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Table 1: Bank wise Growth Rate of Deposits
(Taka in Crore)
End of
NCB’s
Period
Growt
Growth
Private
h Rate
Others*
Total
Rate
Growth
Rate
1985-86
6974.04
-
2139.68
-
1270.78
10384.50
-
1986-87
8030.31
15.15
2722.10
27.21
1645.69
12398.10
19.39
1987-88
8894.61
10.76
3292.15
20.94
1806.24
13993.00
12.86
1988-89
10276.60
15.54
4035.00
22.59
2149.97
16462.50
17.65
1989-90
11901.00
15.81
4894.86
21.28
2313.52
19109.34
16.08
1990-91
13087.3
9.97
5774.70
17.97
2530.55
21352.55
11.95
1991-92
15352.1
17.31
6266.47
8.52
2834.85
24453.46
14.31
1992-93
16815.7
9.53
7681.50
22.58
2558.3
27055.50
10.66
1993-94
19371.2
15.19
8436.40
9.83
3179.4
30987.00
14.53
1994-95
21807.4
12.58
9957.05
18.02
3882.73
35647.20
15.04
1995-96
23665.6
8.52
10738.75
7.85
4162.93
38567.24
8.19
1996-97
25939.8
9.61
12136.36
13.01
4976.28
43052.42
11.63
* Specialized & Foreign Banks
Source: Bangladesh Bank Bulletin, April-June, 1997.
16
Table 2: Sector wise Bank Credit Position
From December 1995 to December 1997
No.
1.
Sector
Agricufture Credit
December
95
Total Outstd.
%
Overdue
%
December
‘96
Total Outstd.
%
Overdue
%
December
‘96
Total Outstd.
%
Overdue
%
5472.39
15%
3783.57
27%
5930.07
14%
4376.61
25%
6144.34
13%
4390.38
23%
5448.49
15%
2382.39
17%
6580.44
15%
2402.92
14%
7693.78
16%
2924.14
16%
6889.75
19%
1989.61
14%
8574.68
20%
2769.57
16%
9239.22
19%
3030.74
16%
Large and medium
2.
Industuies term
Credit
3.
Working Capital
Credit
4.
Export Credit
1700.63
5%
493.61
4%
2169.88
5%
552.91
3%
2667.68
6%
548.1
3%
5.
CommercialCredit
7850.32
22%
2769.31
20%
10078.65
24%
4113.54
24%
12242.76
26%
4329.74
23%
1398.27
4%
707.06
5%
1730.13
4%
883.15
5%
2363.36
5%
1324.63
7%
2181.02
12%
18728.7
39%
6.
Small and Cottage
Industry Term Credit
15%
7
6862.43
19%
1674.98
12%
7819.75
18%
2398.16
14%
7251.58
—
Total
Source:
35622.28
13800.8
8
39%
42883.6
Scheduled Bank Statistics, Bangladesh Bank.
17
17498.86
41%
47602.72
Table 3: Position of Non-resident Investment in Portfolio
Remittance of
Sale
Investment in
Share
Purchase
Sale of
Shares
July’92—June’93
38.75
4.12
3.54
0.58
0.33
3.86
July’93.-June94
310.18
96.51
51.05
90.96
1.76
91.84
July’94—June’95
298.27
133.42
92.81
40.61
9.23
138.89
July’95—June’96
71.68
187.71
189.34
1.63
14.68
197.2
July’96—June97
59.85
618.68
344.34
274.34
12.29
633.21
July 97—Jan. ‘98
15.74
24.71
20.64
4.07
5.1
28.53
Period
Purchased Price
of Sold Shares
Capital
Gain/Loss
Profit Excluding
Capital Gains
Proceeds Abroad
Source: Foreign Exchange Investment Division, Bangladesh Bank
18
Table 4: Direct and Portfolio Investment in Bangladesh
(Taka in million)
Period
1994-95
1995-96
1996.97
Item
Direct Investment (net)
Tk.
237
US$
5.9
Tk.
338
US$
8.3
Tk.
713
US$
16.7
Inflow
298
7.4
506
12.4
740
17.3
Outflow
61
1.5
168
4.1
27
0.6
Portfolio Investment (net)
2462
61.2
-928
-22.7
-5648
-132.2
Inflow
3796
94.4
983
24.1
690
16.2
Outflow
Total Investment (net)
1334
2699
33.2
67.1
1911
-590
46.8
-14.4
6338
-4935
148.4
-115.5
Source:
Statistics Department, Bangladesh Bank.
Note:
Includes cash flow through banking channel only. This excludes investment in KAFCO and that through capital equipment’s.
19