Financial Sector Reforms and the Commercial Banks in Bangladesh

FINANCIAL SECTOR REFORMS AND THE COMMERCIAL

BANKS IN BANGLADESH

1. INTRODUCTION

There is no denying the fact that the 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 must be able to select projects which will yield the highest returns, accumulate sufficient quantities of capital to fund the range of investment projects across economic activities, account for price risks across assets, monitor performance, and enforce contracts. 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. Financial sector in Bangladesh, like most in developing countries, is dominated by banking institutions. With recent gains in financial fronts Bangladesh's financial sector is now comparable with most of the countries in South and East Asia in terms of financial deepening (measured by broad money to GDP ratio). This was 80 percent in India (2008) followed by 50 percent in Bangladesh (2008) and Pakistan (2007) and 35 percent in Sri Lanka. Bangladesh, like other developing countries, still has an underdeveloped financial system and is facing serious problems with the operation of its financial system and poor financial intermediation presents significant disincentives to foster economic growth. Given the very low levels of both domestic and national savings, and together with population growth, Bangladesh needs...