Scholarly Paper

Topic Name: “Role of Banks for the Graduation of Bangladesh to the

category of Economic Development”

FIN 603: Financial Institutions and Markets

Section: 01

Prepared for:

Dr. Salehuddin Ahmed

Professor, BRAC Business School

BRAC University

Prepared by:

Kazi Thasmia Kabir

ID: 19164056

MBA Program, Spring 2021

Date of Submission: 9th March, 2021

Introduction
Since the independence of Bangladesh on 16th December 1971 until 2020, the country has come
in 49 years to a stage of economic development. Bangladesh is managing 160m people with
small area and become a third world country of great potentiality. The country graduating from
the LDCs and fulfilled requirements for gross national income per capita, economic vulnerability
index, human assets index in 2018 and hopes to become a developed country by 2041. But
Bangladesh can’t achieve faster economic growth due to poverty, huge population, lack of land,
lack of natural resources etc. Banking sectors in our country are working on reduction of those
challenges by providing funds. These sectors consist of the Bangladesh Bank, 6 state owned
commercial banks, 3 specialized banks, 5 non-scheduled banks, 9 foreign commercial banks, 41
private commercial banks. The 10000 branches are developed in (43% in rural and 57% in urban
areas).

Generally, banking sector development leads to increase in economic development as it has

ability to facilitate the flow of credit in investment through channeling funds both in private and
public sectors in an efficient way. It provides loan to entrepreneurs in order to finance the
adoption of techniques for new production. Hence, also contribute on economic expansion by
investing in economic sector like- Agriculture industry and trade sector. Banks credit supply
leads to a continues well performing of Bangladesh economy during last few years. Because
banks credit is giving strong support on employment, production and so on. In 2019, GDP had
increased to US$ 302.6bn and growth of gross domestic product tells the financial stability and
reduction of non-performing loan.

Major Drivers contributing to Economic Growth in Bangladesh

In Bangladesh, economic growth held largely by earnings from RMG sector, remittances from
migrant workers, agricultural growth, expansion on MSMEs, reduction on population growth and
poverty, and the govt. safety net programs. Banks have performed an important role on the
respect of four major drivers in the case of economic development of Bangladesh.

Since 1970s, expansion has taken place on RMG sector and become a most important
industry in Bangladesh. After China, our country has become second largest fashion
industry and around 82% of total exports come from this sector.
Bangladesh is a lobour surplus country and annually around 0.5m people migrates in
foreign country in search for a job. In accordance with BMET, total number of migrates
lobour was 11.5m within 2017. It shows that, the figure was about 4.5% of total
population and 11% of total labour force. It means, growth of migrant workers leads to
expansion of annual remittances.
Agricultural sector has noticeable growth over the last four decades. Although there is
loss of cultivable land, the progress in food grain production has increased. This increase
has been possible for adaptation of new fertilizer technology by farmers, rapid expansion
of irrigation and a liberalized input market.
Small and Medium enterprises have performed a significant role in reduction of poverty,
employment generation and development of economy. Bangladesh government has
identified a thrust sector in an industrial policy by the ministry of finance. SMEs has
importance on industrial policy and this policy is efficient to run SMEs, skill
development of entrepreneurs, and adequate allocation of funds.

Role of Banks in Economic Development of Bangladesh

According to all studies, it’s proven that banking sector in Bangladesh plays a remarkable role in
development of economy. Banking sector not only providing funds in both public and private
sector but also facilitating international trade, employment generation, payment of service,
earnings from foreign remittance, housing sector development etc. Banks is performing a major
role in those sectors are below:

RMG sector: Bangladesh is dependent on import rather than export. Because RMG
sector imports raw materials, machineries, accessories etc. for faster development of this
sector. Banks have been facilitating risk management services, finance, payment in RMG
sector. Private commercial banks shared 60% in export finance and it followed by state
owned commercial banks within 2017. RMG sector has received the highest financing
(2014 -2017) from banks within apparel sector.
Foreign Remittance: In middle east countries, Bangladesh had received higher
remittances in last few decades through the banking channels. These channels are
contributing higher remittances with some major factors are:
i) Local banks offered higher rate
ii) Depreciation of Bangladesh taka against US dollar
iii) Due to increase in import payments, many banks facing shortage of US dollar in last
few months and have concentrate on their effort to increase in remittance input
through their channels.
iv) Bangladesh Bank strengthened surveillance on hundi. It is an illegal outlet than
migrant lobours use to send money home.
Agricultural sector: Rural people are heavily dependent on agriculture so that
Bangladesh govt. gave equal emphasis on rural and urban development. Bangladesh govt.
established two specialized banks – Bangladesh Krishi Bank and Rajshahi Krishi
Unnayan Bank for rural economy development. There are other functions done by banks
in this sector:
i) Credit Disbursement: As per the directives of Bangladesh Bank and policy decision,
private and foreign commercial bank along with state-owned banks come forward to
disburse agricultural credit. BKB, RAKUB and 4 state-owned banks played a role in
the disbursement of credit. In 2016, The total outstanding loan increased by taka
329.4bn to taka 344.8 bn in the agriculture sector.
ii) Credit Recovery: In 2016. recovery of agricultural credit increased from 154.1bn to
170.6bn. The overdue agricultural loan is decreased from 20.4% to 16.6% within
2016.
iii) Sources of Agricultural Finance: The major source of agricultural credit in BKB
28%, 6.3% in RAKUB, 2.9% in foreign bank, 15.4% in local state-owned commercial
banks, and 47.4% in private commercial bank.
iv) Bangladesh Bank’s Refinance Against Agricultural Loans: Bangladesh Bank’s
refinance facilities is for lending in agricultural sector in order to create employment
opportunities in rural area and reduction of poverty. BKB, RAKUB and BRAC used
the benefit of refinance facilities from Bangladesh Bank (around taka 6bn) within
2016. These banks help farmers by giving loans in jute sectors for purchase and get a
fair price from raw jutes. It also gives working capital loans to jute products
manufacturer and jute exporters. In Dairy farming industry, dairy farmers get loan for
milk production, cow breeding and rearing cows.
SMEs Finance: Bangladesh Bank developed SME credit policies and programs to ensure
adequate funding for SMEs and aimed in achieving sustainable overall growth.
Bangladesh Bank independently decided the targets and doesn’t impose in commercial
banks. In 2017, the target was taka 1338.6bn, where 1439.7bn was disbursed by all banks
and NBFIs among 697000 cottage and MSMEs. Women entrepreneurs receive special
emphasis from banks is below:
i) Development of Women Entrepreneurs: Bangladesh Bank encourages all banks to
provide loans in lower rate to women entrepreneurs. All banks and NBFIs have been
instructed to keep 15% as reserve in SME funds for new women entrepreneurs under
cottage and MSMEs. They have also been directed to sanction loan at least 2.5m with
personal guarantee but under refinance facilities Bangladesh bank sanction loan
without collateral to women entrepreneurs.
ii) Microcredit Operations for Women Entrepreneurs: Microcredit has been
considered as a pathway for income generation and poverty alleviation. It increasing
savings from rural area and by playing a predominant role in country’s overall
investment. Bangladesh bank has taken proactive role in ICT based financial services.
 For example, mobile banking has already improved access to the poor both in urban
and rural areas and changed an aspect of financial services.

Major Challenges:

In Bangladesh, Banking sector has kept the wheel of the economy moving forward and
considered as the heart of a healthy economy. So, any disruption in banking sector like lack of
leadership, non- compliance with ethical standards, corruption etc. can leads serious affect in the
economy. The major challenges are:

Reduction of NPL: Rising NPL can harm the financial health and banks stability. In
accordance with BB, the amount of toxic loans increased to 11.23% within 2018 and
NPL account for 11.45% of total loans than 2017. Hence, half a dozen state-owned banks
suffered from default loan around taka 480.80bn in 2018 and in 40 commercial banks
default loan around 436.66bn. So, reduction of this upward rise NPL is a challenge for
Bangladesh govt. to become developing country.
Poor governance: Governance plays a vital role in banking sector and also a key issue
that is lacking in this sector. Governance has the power in management of country’s
economy for the development in an efficient transparency way. The quality of
governance can affect the liquidity, asset quality management, debt management etc. So,
the poor governance can hamper the Bangladesh economic development.
Risk Management: In banking sector, risk management is the logical development and
implementation of a plan to deal with possible losses. Generally, it focuses on losses or
risk to protect the value of asset. If this isn’t managed in proper way that can cause
serious affect to the development of economy. For example- liquidity risk, interest rate
risk etc. and asset liability is one of the risks that is occur because of mismatch between
value of asset and liability. It can hamper the financial health as well as healthy economy
in Bangladesh.
Minimization of risk of IT sector: It is another major challenge that private banks and
their branches are 100% equipped with IT sector. According to BIBM, around 52% of all
banks are facing a high risk on cyber security in Bangladesh and 80% of the banks don’t
have skilled staff and enough efficient to resist cyber-attacks.
Recommendation:

The major impediments need to development of economy and also be a developed country by
2041.

Banks need to encourage greater investments in private sector and increase the
investment-GDP ratio.
Bangladesh government must come with helping hand in banking sector and give punish
to the defaulters.
Improve management, efficiency, transparency, leadership both in public and private
banking sector to recover NPLs and other scams like money laundering.
Management of the banks should keep a close eye on the operation of banks to ensure
proper or good governance. And also, compliance with ethical standard within the sector.
Developing the system in banking sector to keep the banking services, information etc.
safe and secure from cyber-attacks. So, HR of the banks must be equipped with updated
IT sector and take proper measures to strength cyber security as well.
Conclusion:

The remarkable elasticity of Bangladesh economy has strong support from banking sector may
help to achieve highest GDP as well as sustainable development. Despite development in
economic condition, if banking sector can’t effectively address the challenges it must hamper the
resilience of an economy. Hence, overcome from challenges can lead to economic growth, and
therefore, improve the living standard of people and poor disadvantageous groups. As
Bangladesh is expected to become a developed country, Government must come with helping
hand in banking sector. Because banks credit is used to invest in project development as well as
in major drivers to boost up economic progress.
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Appendix

Abbreviation

LDCs= Least Developed Country

GDP= Gross Domestic Product

BIBM= Bangladesh Institute of Bank Management

MSMEs= Macro Small and Medium Enterprises

NBFIs= Non-Bank Financial Institutions

ICT= Information and Communication Technologies

NPL= Non performing Loan