The article provides a comprehensive examination of the multifaceted risks confronting

banks in Bangladesh and underscores the critical importance of effective risk

management strategies in navigating these challenges. From credit and interest rate
risks to liquidity, inflation, foreign exchange, and price risks, the banking sector in
Bangladesh faces a myriad of potential pitfalls that can significantly impact financial
performance and economic stability. In this summary, we delve into each risk category,
exploring its implications, underlying factors, and the urgent need for proactive risk
mitigation measures.
1. Credit Risk: This risk arises from the potential default of borrowers, leading to
non-performing loans (NPLs). The text highlights that Bangladesh's banks have
historically faced significant credit risk, resulting in high NPL ratios compared to
international benchmarks. To address this risk, banks must focus on identifying
creditworthy borrowers, thorough monitoring of loans, and implementing
effective risk management strategies to minimize default probabilities.
2. Interest Rate Risk: Fluctuations in interest rates can adversely impact banks'
profitability by affecting interest income and expenses. With the recent removal
of caps on interest rates and the market-driven determination of rates, banks in
Bangladesh are facing increased interest rate risk. To mitigate this risk, banks
should focus on managing their interest rate exposure through diversification of
assets and liabilities, and closely monitoring interest rate movements to make
informed decisions.
3. Liquidity Risk: This risk arises from the possibility of banks facing sudden
withdrawals exceeding their liquid assets, leading to liquidity crises. Bangladesh's
banks often encounter liquidity problems due to mismanagement and
unexpected fund outflows. To manage liquidity risk effectively, banks need to
forecast their liquidity requirements accurately, maintain a prudent fund
management approach, and ensure access to stable sources of funds.
4. Inflation Risk: Inflation can erode banks' real income and reduce the
attractiveness of keeping funds in banks. Higher lending rates driven by inflation
can pose challenges in maintaining loan portfolios. To mitigate inflation risk,
banks should focus on setting appropriate nominal interest rates, diversifying
investment portfolios, and closely monitoring inflation trends to adjust lending
and investment strategies accordingly.
5. Foreign Exchange Risk: Fluctuations in exchange rates can impact the value of
banks' assets and liabilities, particularly in a floating exchange rate regime. Banks
must ensure stable sources of foreign currencies to facilitate international
transactions and manage foreign exchange risk. This involves monitoring
exchange rate movements, maintaining adequate foreign currency reserves, and
implementing hedging strategies to mitigate potential losses.
 6. Price Risk: Investing in stock markets exposes banks to price risk due to the
declining value of investments. Bangladesh's stock markets are characterized by
information asymmetry and a lack of rational guidance, posing additional risks to
banks. To mitigate price risk, banks should exercise caution and conduct
thorough research before investing depositors' funds in stock markets, focusing
on diversification and prudent investment strategies.

Overall, the effective management of these risks requires banks in Bangladesh to

implement a comprehensive risk management framework, including identifying
potential risks, quantifying their impact, developing appropriate strategies for risk
mitigation, and continuously monitoring and evaluating the effectiveness of these
strategies. Additionally, collaboration with regulatory authorities like the Bangladesh
Bank is essential to ensure a stable and resilient banking sector.