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At
the moment financial sector reform programmes are underway.
Private banks and insurance companies with few exceptions are
functioning creditably. Uttara, Pubali and Rupali Banks which
were formally owned by the GOB were privatized. Shadaran Bima
Corporation's (General Insurance) 49% shares are contemplated to
be off loaded in the local stock markets soon.
Bangladesh
pursues a liberal market economy. Bangladesh Bank is the apex
bank of the country responsible for promoting healthy growth and
development of the banking system. Banks and insurance
companies, both in the private and public sectors, are operating
freely and contributing to the economy. Foreign banks like
American Express Bank, Standard Chartered Bank, Grindlays Bank,
Indosuez Bank, etc. function in Bangladesh through their
branches.
There
are other specialized financial institutions like the Bangladesh
Shilpa Bank (Industrial Bank), Bangladesh Shilpa Rin Sangstha
(Industrial credit organization), Krishi (Agriculture) Bank,
House Building Finance Corporation, Grameen (Rural) Bank and
several cooperative banks. The Industrial Promotion and
Development Corporation (IPDC) of Bangladesh and the Investment
Corporation of Bangladesh (ICB) provide equity support to public
limited companies in the private sector. The government has
recently replaced the Controller of Capital Issues by
establishing a full fledged Securities and Exchange Commission
with enhanced power for the growth and development of the
Securities market in Bangladesh. Liberal fiscal policy has
resulted in the highest forex reserve.
During
the last three years a number of steps have been taken to
strengthen the country's banking system. These include
improvement of the regulatory environment. enforcement of loan
classification guidelines and recapitalisation of nationalized
commercial banks. Over the past two years, there has been a
massive infusion of taka 32,000 million in the NCBs in the shape
of government bonds to make up for capital and provisioning
shortfalls.
The
commercial banks are now diversifying and strengthening their
portfolio. They have increased term lending. Upto April 1994
they have sanctioned term loans totaling taka 10,260 million.
Disbursement agricultural loans stood at taka 9,660 million 31 %
increase over the same period in 1993. NCBs have introduced loan
programmes in off-farm and agro-based activities. NCBs, BSB and
BSR have been able to rehabilitate 471 sick industrial units
which have create 21,000 new jobs.
The
government is keen to correct and remedy failures and
imperfection in the financial markets. A small credit guarantee
scheme has been introduced, to assist new entrepreneurs who can
receive loan of taka 2.5 million without any collateral. To
enlarge the activities of Grameen Bank, which serves the poor,
particularly the women in the rural areas, the government has
provided guarantee against loans amounting to taka 4,650 million
in 1993-94 in addition to taka 1000 million provided directly by
the Bangladesh Bank. In the fiscal year 1994-95 the government
has already committed to Grameen Bank to provide loan guarantee
for an additional amount of taka 3850 million.
The
reforms of financial sector and trade liberalisation are being
complemented by appropriate forex regime. An active exchange
rate policy to maintain the competitiveness of the economy is
being followed in the backdrop of the Uruguay Round Multilateral
Trade Agreements and particularly, the gradual merger of Multi-fibre
arrangement into the GATT the exchange rate will be colsely
monitored. Taka has been made convertible on all international
current transactions. Company laws have been reformed for
boosting private investment.
Bangladesh
has accepted the obligations of Article VIII of IMF Articles of
Agreement which means removal of all restrictions on making
payments and transfers for current international transactions.
By accepting these obligations, Bangladesh has given a clear
signal to the international community that it would pursue sound
economic policies, and thereby create a congenial climate for
investment.
Top
The
Banking System
The
banking system at independence consisted of two branch offices of the
former State Bank of Pakistan and seventeen large commercial banks, two
of which were controlled by Bangladeshi interests and three by
foreigners other than West Pakistanis. There were fourteen smaller
commercial banks. Virtually all banking services were concentrated in
urban areas. The newly independent government immediately designated the
Dhaka branch of the State Bank of Pakistan as the central bank and
renamed it the Bangladesh Bank. The bank was responsible for regulating
currency, controlling credit and monetary policy, and administering
exchange control and the official foreign exchange reserves. The
Bangladesh government initially nationalized the entire domestic banking
system and proceeded to reorganize and rename the various banks.
Foreign-owned banks were permitted to continue doing business in
Bangladesh. The insurance business was also nationalized and became a
source of potential investment funds. Cooperative credit systems and
postal savings offices handled service to small individual and rural
accounts. The new banking system succeeded in establishing reasonably
efficient procedures for managing credit and foreign exchange. The
primary function of the credit system throughout the 1970s was to
finance trade and the public sector, which together absorbed 75 percent
of total advances.
The
government's encouragement during the late 1970s and early 1980s of
agricultural development and private industry brought changes in lending
strategies. Managed by the Bangladesh Krishi Bank, a specialized
agricultural banking institution, lending to farmers and fishermen
dramatically expanded. The number of rural bank branches doubled between
1977 and 1985, to more than 3,330. Denationalization and private
industrial growth led the Bangladesh Bank and the World Bank to focus
their lending on the emerging private manufacturing sector. Scheduled
bank advances to private agriculture, as a percentage of sectoral GDP,
rose from 2 percent in FY 1979 to 11 percent in FY 1987, while advances
to private manufacturing rose from 13 percent to 53 percent.
The
transformation of finance priorities has brought with it problems in
administration. No sound project-appraisal system was in place to
identify viable borrowers and projects. Lending institutions did not
have adequate autonomy to choose borrowers and projects and were often
instructed by the political authorities. In addition, the incentive
system for the banks stressed disbursements rather than recoveries, and
the accounting and debt collection systems were inadequate to deal with
the problems of loan recovery. It became more common for borrowers to
default on loans than to repay them; the lending system was simply
disbursing grant assistance to private individuals who qualified for
loans more for political than for economic reasons. The rate of recovery
on agricultural loans was only 27 percent in FY 1986, and the rate on
industrial loans was even worse. As a result of this poor showing, major
donors applied pressure to induce the government and banks to take
firmer action to strengthen internal bank management and credit
discipline. As a consequence, recovery rates began to improve in 1987.
The National Commission on Money, Credit, and Banking recommended broad
structural changes in Bangladesh's system of financial intermediation
early in 1987, many of which were built into a three-year compensatory
financing facility signed by Bangladesh with the IMF in February 1987.
One
major exception to the management problems of Bangladeshi banks was the
Grameen Bank, begun as a government project in 1976 and established in
1983 as an independent bank. In the late 1980s, the bank continued to
provide financial resources to the poor on reasonable terms and to
generate productive self-employment without external assistance. Its
customers were landless persons who took small loans for all types of
economic activities, including housing. About 70 percent of the
borrowers were women, who were otherwise not much represented in
institutional finance. Collective rural enterprises also could borrow
from the Grameen Bank for investments in tube wells, rice and oil mills,
and power looms and for leasing land for joint cultivation. The average
loan by the Grameen Bank in the mid-1980s was around Tk2,000 (US$65),
and the maximum was just Tk18,000 (for construction of a tin-roof
house). Repayment terms were 4 percent for rural housing and 8.5 percent
for normal lending operations. 
The
Grameen Bank extended collateral-free loans to 200,000 landless people
in its first 10 years. Most of its customers had never dealt with formal
lending institutions before. The most remarkable accomplishment was the
phenomenal recovery rate; amid the prevailing pattern of bad debts
throughout the Bangladeshi banking system, only 4 percent of Grameen
Bank loans were overdue. The bank had from the outset applied a
specialized system of intensive credit supervision that set it apart
from others. Its success, though still on a rather small scale, provided
hope that it could continue to grow and that it could be replicated or
adapted to other development-related priorities. The Grameen Bank was
expanding rapidly, planning to have 500 branches throughout the country
by the late 1980s.
Beginning
in late 1985, the government pursued a tight monetary policy aimed at
limiting the growth of domestic private credit and government borrowing
from the banking system. The policy was largely successful in reducing
the growth of the money supply and total domestic credit. Net credit to
the government actually declined in FY 1986. The problem of credit
recovery remained a threat to monetary stability, responsible for
serious resource misallocation and harsh inequities. Although the
government had begun effective measures to improve financial discipline,
the draconian contraction of credit availability contained the risk of
inadvertently discouraging new economic activity.
Foreign
exchange reserves at the end of FY 1986 were US$476 million, equivalent
to slightly more than 2 months worth of imports. This represented a
20-percent increase of reserves over the previous year, largely the
result of higher remittances by Bangladeshi workers abroad. The country
also reduced imports by about 10 percent to US$2.4 billion. Because of
Bangladesh's status as a least developed country receiving concessional
loans, private creditors accounted for only about 6 percent of
outstanding public debt. The external public debt was US$6.4 billion,
and annual debt service payments were US$467 million at the end of FY
1997.
International
Banks
The
World Bank has taken the lead in addressing some of the most deep-seated
structural constraints in Bangladesh's economy by providing productive
employment for those without assets, promoting economic opportunities
for women, and addressing the social and economic inadequacies of
education, health, nutrition, and population programs. Among aid
projects were the Irrigation Management Programme, which supports
drainage and flood control as well as the introduction of pumps and
drills; support for maintenance of the nation's more than 43,000 primary
schools (including repairs to existing buildings, additions to
accommodate larger numbers of pupils, and construction of new schools
where needed); and the 500,000-ton Ashuganj fertilizer complex,
utilizing domestic natural gas, which came on stream in 1981. The World
Bank has made loans to Bangladesh only from its "soft window,"
the International Development Association. These interest-free loans
provide for a 10-year grace period before repayment of principal begins
and a 40-year repayment schedule, with the addition of a service charge
of 1.5 percent.
The
Asian Development Bank was the second largest donor, after the
International Development Association, to Bangladesh's development in
the 1980s. As of the end of 1985, the Bank had approved 66 loans
totaling US$1.8 billion. In 1985 alone, the bank approved loans of
US$212.3 million for 6 new projects (down from US$306.8 million for 4
projects the year before). In addition, the bank provided local currency
financing of US$59.8 million for 3 projects, cofinancing of US$10.5
million to projects with other donors, and a program loan of US$39
million for provision of fertilizer. About half of the Asian Development
Bank's financing has gone to agriculture and agro-industry. The 1985
package, for example, included a livestock development project intended
to increase food production and improve rural incomes through expansion
of veterinary services and livestock nutrition. In 1987 the Asian
Development Bank approved a technical assistance grant (cofinanced by
the Norwegian government) to explore the feasibility of growing rubber
trees commercially in Bangladesh. The Asian Development Bank also has
been active in the development of natural gas. In 1987 the bank approved
a US$74 million loan for construction and extension of natural gas
transmission and distribution pipelines to 5 districts in eastern
Bangladesh. The loan was intended to cover 71 percent of project costs,
including all of the foreign exchange requirements for the project. The
bank has also supported transportation projects (development and
improvement of feeder roads between local markets and primary roads,
inland waterways, and railroads) and social welfare schemes for
population control, health, and education.
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