Evaluation of Banking Sectors Development in Bangladesh in light of Financial Reform

TL;DR

This paper assesses the evolution of Bangladesh's banking sector over decades, analyzing reforms aimed at improving asset quality, regulation, and market orientation, and their effectiveness in strengthening the sector.

Contribution

It provides a comprehensive evaluation of Bangladesh's banking reforms and their impact on sector development over time.

Findings

Improved asset quality and capitalization post-reforms

Enhanced regulatory and supervisory frameworks

Increased private sector participation in banking

Abstract

Historically, the performance of the banking sector has been weak, characterized by weak asset quality, inadequate provisioning, and negative capitalization of state-owned banks. To overcome these problems, the initial phase of banking reform (1980-1990) focused on the promotion of private ownership and denationalization of nationalized commercial banks (SCBs). During the second phase of reform, Financial Sector Reform Project (FSRP) of World Bank was launched in 1990 with the focus on gradual deregulations of the interest rate structure, providing market-oriented incentives for priority sector lending and improvement in the debt recovery environment. Moreover, a large number of private commercial banks were granted licenses during the second phase of reforms. Bangladesh Bank adopted Basel-I norms in 1996 and Basel-II during 2010. Moreover, the Central Bank Strengthening Project initiated in 2003 focused on effective regulatory and supervisory system, particularly strengthening the legal framework of banking sector. This study evaluates how successfully the banking sector of Bangladesh has evolved over the past decades in light of financial reform measures undertaken to strengthen this sector.