Bangladesh Financial Sector. Syed Ali-Mumtaz H. Shah
in remittances slowed, inflows from that source still climbed by 22.4% to $9.7 billion in FY2009, which has reached the rural poor and helped finance the purchase of land and agricultural inputs. Furthermore, investment in irrigation, research, and extension, together with more liberal agriculture input and output markets, triggered a rise in productivity, especially in rice cultivation and fisheries.
Prospects for FY2010 will depend on some key assumptions. It is assumed that political stability will prevail, and that the Government will be able to move forward in fulfilling its development priorities, sustain its focus on prudent macroeconomic management, and deepen economic reforms. It is also assumed that the measures outlined in the FY2010 budget to accelerate annual development program utilization (streamlining project approval processes and raising institutional capacities in key line ministries) will be implemented, and that the private sector will invest more in infrastructure through the new public–private partnership scheme. It is further assumed that the Government will be able to mobilize adequate external assistance and improve revenue mobilization, and avoid crowding out the private sector through excessive bank borrowing. Growth projections also assume normal weather conditions.
Against this background, GDP growth is forecast at 5.2% in FY2010 as the global economic slowdown persists, with continued moderation in external and domestic demand.
The Financial Sector in Bangladesh
Background. The financial sector in Bangladesh comprises the money and capital markets, insurance and pensions, and microfinance. In addition to the Bangladesh Bank—the central bank of Bangladesh—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 2008.3 Figure 1 depicts the nature of the financial sector in Bangladesh.
Figure 1: Financial Sector in Bangladesh
Source: Policy Analysis Unit, Bangladesh Bank.
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. For example, in the banking subsector, as of September 2008, there were 4 SCBs, 5 government-owned specialized banks dedicated to agricultural and industrial lending, 30 domestic PCBs, and 9 foreign commercial banks. The specialized banks are often called development finance institutions (DFIs). Out of the five specialized banks (enjoying 10% of the total industry’s assets), 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 Shilpa Rin Sangstha were set up to extend term loans to industry.
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 total value of loans and leases granted by these institutions is Tk99.1 billion as of 31 December 2007. 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 Sadharan Bima Corporation for general insurance and the Jiban 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.
To evaluate the Bangladesh financial sector from a regional perspective, the combined share of banking and insurance in the country’s GDP stayed in the 1.5%–1.6% range during FY2002–FY2006, while in India this was the case in the late 1960s and early 1970s. The Indian share during FY2002–FY2005 averaged 6.6%, or over four times that of Bangladesh. On the level of financial deepening, as measured by the rate of monetization of the economy, the broad money (M2) to GDP ratio in Bangladesh stood at 45.3% for FY2007, compared to 24.5% for India and 39.2% for Sri Lanka in the same period. In terms of stock market capitalization, the market capitalization of the Dhaka Stock Exchange (DSE) stood at 17.8% of GDP at the end of FY2008,4 compared with 60.0% for the Mumbai Stock Exchange, 35.9% for the Karachi Stock Exchange, and 23.9% for the Colombo Stock Exchange. Market capitalization of DSE rose by 36.1% during FY2009 to reach $19 billion in June 2009 (or over 21% of GDP), reflecting the listing of companies and declaration of bonus shares in lieu of cash dividends. The development of the insurance subsector is comparable to that of Pakistan, but it lags behind both Sri Lanka and India by a considerable margin. The total premium income to GDP of Bangladesh reached a mere 0.6% in 2004, compared with 0.7% in Pakistan, 3.1% in India, and 1.6% in Sri Lanka.
Overview of recent key developments. The government launched a financial sector reform program in 1990. The program pursued a series of legal, policy, and institutional reforms to improve the process of financial intermediation, as well as to ensure more efficient allocation of financial resources and to improve the competitiveness of the private sector, thereby promoting investment and growth in the real sector. The thrust of the reform program is to improve the regulatory and governance environment and to enhance the ability of bank owners, management and regulators, and the markets themselves to provide for better governance and regulation to achieve the above-mentioned objectives. The reform program aims to (i) give greater autonomy to the Bangladesh Bank, (ii) strengthen the Bangladesh Bank’s capabilities and technical skills to perform its enhanced responsibilities, (iii) strengthen prudential regulation and supervision, (iv) restructure the management and internal processes of SCBs and ultimately privatize selected SCBs and specialized banks, (v) strengthen the legal and judicial processes, and (vi) improve the money and debt markets. Most recently, the reforms for developing the financial markets by the Bangladesh Bank and other authorities include development of the government securities market and the creation of an appropriate market support infrastructure.
ADB’s interventions include the $80 million Capital Market Development Program5 loan approved in 1997. The program loan aimed to enhance market capacity and develop a fair, transparent, and efficient domestic capital market. This would attract larger amounts of investment capital which can augment capital provided through the banking system and thereby improve efficiency in allocating resources. The Capital Market Development Program was designed to achieve (i) stronger market regulation and supervision, (ii) improved capital market infrastructure, (iii) modern capital market support facilities, (iv) increased supply of securities in the capital market, and (v) increased institutional demand for securities. The program’s objectives were largely achieved. The program remains relevant to the country’s strategy and development objectives, and has achieved significant progress in many areas, including strengthening regulation and supervision and developing infrastructure in the capital market. However, the reforms to increase the supply of securities and develop institutional demand have progressed slowly, due mainly to lack of government commitment and a shortage of competent staff. Overall, the Capital Market Development Program was assessed partly successful by ADB’s Independent Evaluation Department.
The performance of the four SCBs is monitored under memorandums of understanding signed by each of them and the Bangladesh Bank, in relation to tightened prudential norms and lending limits. Their performance has been mixed, however, due in part to government-directed extensions of credit. The government has taken steps to corporatize the SCBs and make them more autonomous while keeping them under the regulatory purview of the Bangladesh