Development Of A Sustainable Financial System For Bangladesh Finance Essay

The economic growing and fiscal intermediation are extremely correlated to each other. Both bank based system and market based system can be used for the intermediation. However, fiscal crisis in Japan and in the US put the developing states in a quandary in taking a bank based system or a market based system for the channelisation of financess from the excess to the shortage sector. Bangladesh is in no exclusion. In this respect, the present survey, which is based on secondary informations, identifies the causes of the planetary fiscal crisis and its redresss. In add-on, the survey will foreground the bing fiscal system and its public presentation in Bangladesh. It will besides urge a sustainable fiscal system for Bangladesh with some cardinal factors, which are required for the well being of the fiscal system in peculiar and the economic system at big.

Cardinal words: Central Regulatory Authority ( CRA ) ; Efficaciously Supervised, Liberalized, Market-based, and Regulated Financial Sector.

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The economic growing of a state is mostly dependent on the channelisation of financess from the excess to the shortage sector, which can be done through the procedure of intermediation. This intermediation procedure can be bank-based or market-based, depending upon the features of a state. For illustration, in Japan and Germany bank dominates the intermediation procedure, whereas Anglo-Saxon states rely more on the market for the funding demands. The people in developing and under developed states are ever in a quandary sing the development of their fiscal system. They are non certain whether to travel for the bank based system or market based system. Obviously before the US fiscal crisis, everybody considered market based system superior to bank based system. But now both the two systems failed: bank based system failed in Japan and market based system failed in the US. Therefore, under the present scenario, it is truly hard to state which 1 is better and developing a new theoretical account is non at all an easy occupation to make but non impossible. Looking at the grass root of the two systems ‘ failure will decidedly give some clear penetration about the development of the future fiscal system.

Why the two systems failed in Japan and in the US? The Japanese relationship bank system was working really good from 1950s to mid 1970s. The traditional academic definition is that a chief bank relationship is a long-run relationship between a house and a peculiar bank from which the house obtains its largest portion of adoption. The chief Bankss besides play corporate monitoring and administration function by step ining whenever things go incorrect for the house and as a consequence of this the chief bank system besides refers to a system of corporate funding and administration ( Aoki and Patrick, 1994 ) . But everything started to alter when the authorities went for deregulating during 1980s. The capital construction of Nipponese houses underwent a dramatic transmutation. Reputed houses with higher profitableness and growing chances with low hazard progressively depended on capital markets for their fiscal resources, while houses with lower profitableness continued to depend on bank borrowing during 1980s. Strict bank monitoring besides induced houses to trust on stock and bond markets. This big displacement along with the freedom allowed Bankss to take bad hazards and more Bankss were viing for sedimentations ( Krugman, 2009 ) . The ultimate result was moral jeopardy and bad investing that led to fiscal bubble and matching bubble explosion during 1990s.

On the other manus, the market based system was running successfully before 2007 in the US. Everything was dramatically changed when the bubble explosion in 2008 and the ambiance became electric. Many bookmans were seeking to place the cardinal causes of the fiscal crisis and gave their sentiments. Harmonizing to Solos ( 2008 ) the surplus in fiscal market were due to ( I ) regulators failure to exert proper control and inability to understand the effects of fiscal inventions, ( two ) inordinate usage of purchase supported by sophisticated hazard direction theoretical accounts that can cipher known hazard but ignore uncertainness inherent in reflexiveness, and ( three ) freshly introduced fiscal instruments and methods which were based on false premises. Before the bubble explosion borrowers with less than perfect or no recognition history could acquire a loan. All of these led to the formation of fiscal pudding stones that were considered as excessively large organisations to neglect. But in existent scenario the contrary was happened. In add-on, there is every possibility that conflicts of involvement will look in the hereafter because of their multiple functions in securities subventioning, in loaning and investment, in secondary market activities, and in pull offing other people ‘s money ( Kaufman, 2009 ) . They besides induced to alter people ‘s construct about liquidness since before the recognition bubble it was treated as something related to plus side of the balance sheet, whereas during the recognition bubble it was considered as something associating to liability side. Posner ( 2009 ) viewed that low involvement rate in the early 2000s and deregulating motion began in the 1970s were in fact laid the foundation of the crisis. Low involvement rate made borrowing cheap that resulted into low personal nest eggs rate and high personal debt rate. It besides encouraged people to buy houses and put in stocks, which led to plus bubble and attendant bubble explosion. On the other manus, deregulating allowed fiscal mediators like investing Bankss, money market financess, hedge financess, and commercial Bankss to countervail each other by offering closely substitutes services. In peculiar, because of the remotion of Glass-Steagall Act commercial Bankss were to a great extent relied on short-run recognition other than sedimentations and existent estate investing trusts ( REITs ) was involved in loaning in add-on to investing banking. As a consequence, fiscal market became really competitory and net income border was squeezed. In response to this, Bankss tried to cut down hazard by securitized debt and recognition default barters. Government policymakers liked securitization because it appeared to distribute hazard loosely, which made a fiscal crisis less likely ( Zandi, 2008 ) . But unluckily it was non true once more and about all of the losingss came from prosecuting the blemished trading scheme of borrowing short and puting in long-run senior mortgage backed securities ( Milne, 2009 ) . Rating bureaus besides severely misguided the hazards and everybody was concentrating on metre reading without understanding the forces at work ( Bryan and Rumelt, 2009 ) . The lodging bubble combined with the inducement system implicit in the securitization procedure amplified moral jeopardy, further cheering some of the worst histrions among mortgage loaners ( Shiller, 2008 ) .

The fiscal convulsion deepened at an dismaying rate and affect non merely fiscal, recognition, and currency markets but besides the existent economic system. In Bangladesh, even though the impact of the fiscal crisis has non been straight felt chiefly due to screening of the economic system from the most immediate effects of the crisis, the looming economic conditions and fiscal market instability in the developed and several emerging economic systems can make inauspicious impacts on the Bangladesh economic system. No uncertainty it is hard to foretell how the fiscal crisis would impact the hapless states like, but it is comparatively safe to reason that the effects are more likely to be indirect for Bangladesh since the state has small direct exposure to the neglecting fiscal establishments and toxic assets in the developed universe. Still a underdeveloped state like Bangladesh can larn many cases from the planetary fiscal crisis and consequently develop or reshape their fiscal system so that they can avoid the happening of fiscal crisis in their ain district. In this respect, the present survey is undertaken to suggest some guidelines for the development of a sustainable fiscal system for Bangladesh concentrating on planetary fiscal crisis.

Aims of the Study

The chief aim of the survey is to suggest a sustainable fiscal system for Bangladesh with mention to the planetary fiscal crisis. To carry through this nonsubjective, following specific aims are to be covered:

To place the cardinal grounds of the planetary fiscal crisis and the lessons to be learnt from the planetary fiscal crisis.

To develop a sustainable fiscal system for Bangladesh.

To propose a policy model for the efficient operation of the proposed fiscal system.

In order to carry through the above aims, the first subdivision of this survey will lucubrate the bing fiscal system in Bangladesh and its public presentation ; the 2nd subdivision will discourse the grounds and the lessons to be learnt from the crisis ; and the 3rd subdivision will suggest a sustainable fiscal system with some recommendations.

Methodology of the Study

The present survey is based on secondary informations. In peculiar, the survey will concentrate on bing literature on planetary fiscal crisis for observing the grounds of the crisis and its corresponding redresss. In add-on, assorted one-year studies are besides considered for the survey in order to give a snapshot of the bing fiscal system in Bangladesh and its public presentation.

Fiscal System in Bangladesh


The fiscal environment of Bangladesh consists of 4 nationalized commercial Bankss ( NCBs ) , 5 authorities owned specialised Bankss ( SPBs ) , 30 domestic private commercial Bankss ( PCBs ) including 6 Muslim Bankss ( IBs ) , 9 foreign Bankss ( FCBs ) , 28 non-bank fiscal establishments ( NBFIs ) , big figure of microfinance establishments, and 62 insurance companies. Besides, the fiscal system includes 2 stock exchanges ( i.e. , Dhaka Stock Exchange Ltd. and Chittagong Stock Exchange Ltd. ) and a figure of co-operative Bankss. All the scheduled commercial Bankss are runing under the counsel and supervising of the cardinal bank, which is named as Bangladesh Bank[ 1 ].

Presently, two recognition evaluation companies are besides working in Bangladesh: Recognition Rating Information and Services Ltd ( CRISL ) , Credit Rating Agency of Bangladesh Ltd ( CRAB ) . In add-on, there are five legal guardians of plus backed securities and common financess, seven plus direction companies, and six security keepers.

The procedure of securitization has non yet gear up in Bangladesh since there are merely two instances of plus backed securitization. The first of all time plus backed securities was introduced in Bangladesh in November 2004. An sum of BDT 359 million ( local currency of Bangladesh ) has been floated in the state by the Industrial Promotion and Development Company ( IPDC ) of Bangladesh, a non-bank fiscal establishment. Later in February 2005, another issue of BDT 190 million has been floated by another non-bank fiscal establishment viz. the Industrial Development Leasing Company ( IDLC ) of Bangladesh ( Siddiquee et. al. , 2006 ) . On the other manus, loan sale of commercial Bankss and trading of derivative securities have non yet started in Bangladesh. The authorities is be aftering to originate the trading of fiscal derived functions by the terminal of the twelvemonth 2010.

Tracing the Development of the Financial System:

The growing and development of the fiscal system in Bangladesh since its independency in 1971 can be categorized into three major stages: 1st stage, from 1972-1982: during the period the authorities was aimed at nationalisation, Reconstruction, and enlargement of Bankss ; 2nd stage, 1983-1989: the authorities focused on denationalisation and denationalization ; and 3rd stage, 1990-today: the authorities was stressing on fiscal liberalisation and consolidation through originating a wide based fiscal liberalisation step under the name of the ‘Financial Sector Reform Program ( FSRP ) ‘ .

Performance of the Banking Sector:

The banking sector in Bangladesh is really much competitory. All of the Bankss are runing within a little industry where inordinate competition is ever existed among the Bankss. The predominating market competition induces the Bankss to pay out loans without proper showing of the borrowers. Harmonizing to Islam et. Al. ( 1999 ) , in malice of the liberalizing and privatizing of the banking sector in the eightiess with a position to increasing efficiency and competition, the hardiness of the recognition environment deteriorated further because of the deficiency of effectual resort on borrowers. All of these brands disbursed loans to non-performing loans which non merely severely affects the Bankss but besides the full economic system as a whole. The public presentation of the Bankss can be judged on the footing of many variables and the non-performing loans to entire disbursed loans is one of the important variables that reflects efficiency of commercial Bankss. The tabular arraies 1 and 2 in the appendix give an thought about the non-performing loan scenario of the banking sector of Bangladesh. Harmonizing to those two tabular arraies, the per centum of non-performing loans to entire loans in Bangladesh has been diminishing over the period from 1998-2007, still the per centum was important ( 13.20 % ) during the calendar twelvemonth 2007. In comparing to the South Asiatic states like India and Srilanka, Bangladesh holds the highest per centum of non-performing loans to entire loan expense during recent old ages. In peculiar, the per centum was 13.56 % in 2005 compared to 5.20 % of India and 9.60 % of Srilanka.

What Bangladesh Can Make?

There is no uncertainty that the bank based system is better for any state in Asia Pacific Region. The built-in civilization in Bangladesh is more suitable to the relationship based banking of Japan. The authorities can place some Bankss with sound fiscal wellness and let them to sponsor each sector with all of the services required to go success.

But it is excessively late to make so. This may be one inquiry to debate since already the authorities embraced fiscal liberalisation, which basically caused both the two systems to neglect in Japan and in the US. Another fact is that both two stock exchanges in Bangladesh, viz. Dhaka Stock Exchange Ltd. ( DSE ) and Chittagong Stock Exchange Ltd. ( CSE ) , are in full suing of their operations since the entire market capitalisation of the DSE whopped to BDT 931.03 billion on June 30, 2008 as against BDT 475.86 billion of June 30, 2007, demoing a 95.66 per cent addition ( DSE Annual Report 2007-2008 ) . On the other manus, the market capitalisation of CSE increased from BDT 56,364 million in 2001 to BDT 219,942 million in 2005. In this circumstance, if the authorities neglects capital market and focuses on the bank based system it may make more jobs. Therefore, it is better to supply a modified version of the bing fiscal system which will be more sustainable for the hereafter. Before that, it is necessary to foreground the cardinal causes of planetary fiscal crisis and some recommendations given by assorted writers sing US fiscal crisis.

Causes and Lessons to be Learnt from the US Financial Crisis

There are many grounds that worked together to speed up the recognition bubble in the US and matching bubble explosion. The undermentioned figure will give some thought about the grounds of the crisis based on the literature: Figure 1: Cardinal Reasons of the US Financial Crisis.

Use of Backward Looking Risk Modeling Tools

Excessive Use of Leverage

Excessively much Focus on Meter Reading

Removal of Glass-Steagall Act

Beginning: Literature Survey

Under the present scenario, it is better to concentrate on the recommendations given by erudite writers, which will supply some penetration about the alteration of the bing fiscal system in Bangladesh. It will assist the authorities to protect its fiscal system from fiscal convulsion.

Harmonizing to Shiller ( 2009 ) , none of the proposals suggested by the US authorities after the fiscal crisis represent a true institutional invention. They are simply speedy holes that fail to turn to the full range of the job. He suggested making the occupation of widening inventions of modern fiscal engineering together with effectual precaution throughout the society and invention made by Grameen Bank of Bangladesh can be an illustration.

Harmonizing to Solos ( 2008 ) , a new paradigm: the acknowledgment of reflexiveness is required. Reflexivity can be defines as “ act of self-reference where an action ‘bends back on ‘ and affects the entity inciting the action ” . He besides argued the followers to be done:

The governments must exert more watchfulness and control during the expansionary stage. This will modulate supply of money and recognition creative activity.

Regulators must confirm control over the usage of purchase. It will cut down both the size and the profitableness of the fiscal industry.

A glade house or exchange must be established for recognition default barters with a sound capital construction and rigorous border demands to which all bing and future contracts would hold to be submitted.

Geisst ( 2009 ) said that a combined attempt of the Fed and the exchequer should move together to organize financial and pecuniary policies, particularly when it involves consumer recognition and mortgage recognition. He suggested integrating the following for the improvement of the fiscal system:

Larger down payment and stronger borrower ratios normally would be sufficient to decelerate the bureaus ‘ intermediation.

Change the revenue enhancement Torahs sing capital additions on lodging.

The whole issue of complexness in fiscal design needs to be addressed because that kind of complexness has produced much confusion among legislators.

Securitization procedure demands to be repaired instantly.

European coverage construct of securitization is better than American exposed one.

Mortgage recognition should be included in the class of consumer recognition.

Kaufman ( 2009 ) called for an superintendent who will look after the capital adequateness, soundness of trading patterns, exposure to struggle of involvement, and other steps of stableness and fight. It will put guidelines for the participants in the fiscal derivative markets. Furthermore, he suggested to spin-off the assets of large pudding stones and they should be under tight supervising so that it will be possible to guarantee the fact ‘too good to neglect ‘ instead than current proposition ‘too large to neglect ‘ . He besides criticized IMF and opined to hold an International Supervisory organic structure in order to oversee and modulate major fiscal markets and establishments around the universe.

Proposed Financial System

The fiscal system of Bangladesh has non yet that complicated and hence it is the right clip to reshape the fiscal environment for the hereafter. The debut of loan sale and fiscal derived function will decidedly do the market more complex. Most of the writers mentioned in the above propose controlled liberalisation since excessively much freedom can guarantee economic prosperity in the short tally but non in the long tally. Under the current fiscal system in Bangladesh, both the depositary and investing mediators enjoy deregulated environment. Bangladesh Bank proctors the bank market whereas SEC monitors the stock and bond markets. But the job is that there is no coordination among the two regulative organic structures. There is every possibility that one concern organisation that takes loan from bank as good issues securities may non subject same public presentation study to bank and stock exchange. This anomalousness of information remains concealed due to miss of coordination among two regulative organic structures. Even the recognition evaluation bureaus are making their evaluations by integrating quantitative theoretical accounts without sing the evaluations made by Bangladesh Bank and SEC, although they possess more information about a peculiar bank or concern house. In this respect, the authorities of Bangladesh can set up a new entity in the name of Central Regulatory Authority ( CRA ) that will supervise both the banking market and the stock market. It will assist to get the better of the bing job of information dissymmetry between the two regulators by keeping cardinal fiscal database, which is presently non available in Bangladesh. Figure 2 of the appendix shows the diagram of the proposed fiscal system. However, the cardinal function of the authorization will be to guarantee a liberalized, market based, and efficaciously supervised and regulated fiscal environment. In order to guarantee this CRA has to see the undermentioned cardinal factors to continue a sustainable fiscal market.

Factors to be Considered:

1. Partial Loan Sale: During the subprime state of affairs Bankss and other fiscal establishments sold the loan and created new loan. So there was no monitoring from bank ‘s position. But this is non good at all. There should be some ordinance so that Bankss could non be able to sell the full loan. It will guarantee the engagement of Bankss in supervising the borrowers after the securitization. It will besides guarantee the coverage of loans in bank ‘s balance sheet instead than extinguishing it from that. The regulators of Bangladesh should see this when loan sale will get down in Bangladesh. It will be better if the authorities delegates the authorization to the proposed Central Regulatory Authority ( CRA ) to implement this partial loan sale agreement.

2. Boundary of Making Business: The remotion Glass-Steagall Act was one of the cardinal grounds of the US fiscal crisis. It eliminated the boundary of making concern for the fiscal mediators. In Bangladesh as per the jurisprudence commercial Bankss deal with loaning and adoption of money and a few of them is involved in merchandiser banking. On the other manus, investing Bankss deal with reding, underwriting, and secondary market activities. The authorities should go on this segregation when it initiates loan sale and derivative trading in the fiscal market so that fiscal establishments can non traverse their boundaries and embrace the ruin by going excessively large. It is besides of import to do certain that the securitization procedure will non go that complex in the hereafter.

3. Recognition Rating Reform: The recognition evaluation bureaus besides misguided the hazard during the recognition bubble in the US. They did the evaluation by utilizing their ain quantitative theoretical accounts. They did non integrate the evaluation done by the cardinal bank and the SEC. Presently the same thing is besides go oning in Bangladesh. But it will be better if the recognition evaluation bureaus can integrate the remarks of the cardinal bank and the SEC sing an single borrower or a concern house or a fiscal establishment, since both the cardinal bank and the SEC has their ain evaluations.

4. Revisit Deposit Insurance Premium Calculation: So far the rate of sedimentation insurance premium is same for all the Bankss, which is non at all a justifiable manner. It encourages hazardous Bankss to take hazardous investing and discourages good Bankss. At the same clip it is truly hard to present a new system. If the cardinal Bankss charges different Bankss with different rates, it will severely impact the assurance of the depositors of peculiar Bankss. Therefore, the cardinal bank of Bangladesh can go on with the same rate but can supply other benefits more to good Bankss compared to moo executing Bankss so that Bankss ever have the inclination to better their public presentations.

5. Coordinated Attempt: It is ever necessary to keep long-run stableness of the full fiscal system of a state. Coordinated attempt among the regulative organic structures is chiefly required to make so. The proposed Central Regulatory Authority ( CRA ) will guarantee coordination among the Treasury, cardinal bank, and SEC, which will in bend help the authorities to repair financial and pecuniary policies.

6. Adequate Use of Leverage: Excessive usage of the purchase besides accelerated the US crisis to happen. In order to modulate the purchase, sound capital adequateness ratio is an extreme necessity. This capital adequateness ratio should non be determined for a long-run footing. It should be monitored on a uninterrupted footing to forestall bad effects. Again the authorities of Bangladesh can depute the authorization to the proposed Central Regulatory Authority ( CRA ) so that Bankss use leverage optimally instead than overly.

7. Controlled-deregulation: It is already mentioned that deregulating besides laid down the foundation of the US fiscal crisis. There is obvious uncertainty about the future continuance of this long precious deregulating. Now, it is the right clip to travel for controlled-deregulation instead than a free signifier of deregulating.

8. Interest Rate Monitoring: This is another macroeconomic factor which is required to supervise on a uninterrupted footing. The US fiscal crisis besides makes it clear that low rate of involvement is non ever good for the economic system. It should non be fixed for a long period of clip. Central Regulatory Authority ( CRA ) can manage this by confer withing with the Treasury and the cardinal bank.

9. Reformation of Reward System: Awarding big fillips becomes a serious issue after the crisis. This sort of fillips is besides traveling on in Bangladesh, preponderantly in the private sector. The authorities should besides see this with huge prudence and enforce some sort of ordinance.


The fiscal crisis will reshape the fiscal universe over old ages to come. The future sustainability of a state ‘s fiscal market mostly depends how rapidly and smoothly it can accommodate to the altering fiscal environment. The crisis besides shows that there is no replacement of prudent authorities intercession and careful ordinance even when market based system is in operation. The chase of free fiscal sector panacea does non vouch against moral jeopardy, inauspicious choice, and the fiscal establishments to do systemic hurt. This does non intend that the fiscal sector should be administratively controlled and non be allowed the freedom to introduce, vie, and use market based inducements. Rather, a liberalized, market based, and efficaciously supervised and regulated fiscal sector capable of bring forthing quality information is necessary in order to advance and prolong rapid growing of a state like Bangladesh under the current altering fiscal environment. The of import issue for Bangladesh may be to interpret the current planetary crisis into an chance to step frontward


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SIDDIQUEE M. , HOSSAIN F. , ISLAM K. M. Z. , & A ; HOSSAIN M. F. ( 2006 ) . “ Asset Securitization in Bangladesh: Practices and Hindrances ” . The Cost and Management, Bangladesh. Vol.35, No.2, pp 19-38, March-April, 2006.



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