Financial System of Bangladesh

Introduction:
Financial system is most important issue of a country and all industrial societies is followed by
financial system. There are two types of financial system one is bank base financial system and
another one is market base financial system. Financial system of a country is based on the degree
to use or practice of financial systems either bank-based or market-based. Which country focuses
on which system this tells us about the financial system of this country. In bank base financial
system, whole economy focuses on bank industries how they do their activities good or bad. In
bank base financial system, bank give their attention basically on loan and the also try to hold up
and create dominating power on this sector. In this financial system, stock market domination is
low visible in economy. On the other side market base financial system focus on how performing
the stock market Is it in good or poor situation? and they also keep less focus on bank
activities. In market base system there is high risk of losing or gaining and it also can differ day
by day like ones share price is high but it can also fall down cause sell interest of market.
Because people are yield loving if they get high price they can sell it any time. But bank base
system shows a consistent way of economy. Like their growth and fall down is happening in a
systematic way and simultaneously. In a bank base system there is low government legislation
and fewer number of private sector competitor who can compete with banking system. There is
the one sector which can control the economy. In contrast market base systems people focus on
non banking financial system as source and then market and sometimes government force them
to neutral the interest policy along with them. In market base system banks are under controlled
by market or government and sometimes there banks have to do according to market interest. So
both systems are exist in both situation but under control of each other in different situation and
both are also interrelated with each other but its domination can be differed when they
dominating each other. So in our assignment we talked about which is better and their positive
and negative impacts.
Literature review:
Economists have long debated the advantages and disadvantages of bank-based financial systems
vice versa market-based systems. The debate has primarily focused on four countries. In bank-
based financial systems such as Germany and Japan, banks play a leading role in savings,
allocating capital, regulating the investment decisions of corporate managers and in providing
risk management information. In market-based financial systems such as England and the United
States, securities markets share center stage with banks in terms of getting societys savings to
firms, exerting corporate control, and easing risk management. Some analysts suggest that
markets are more effective at providing financial services. Others tell the advantages of
intermediaries. The debate is still unsolved. There is a major shortcoming with existing
comparisons of market-based versus bank based financial systems. Some analysts focus on a
very narrow set of countries with similar levels of GDP per capita, so that the countries have
very similar long-run growth rates. Thus, if one accepts that Germany and Japan are bank-
based and that England and the United States are market based and if one recognizes that
these countries all have very similar long-run growth rates, then this report tells that financial
structure did not matter much.
Asli Demirguc-Kunt and Ross Levine showed a comparison with a 150 countries that follow
different financial system in a report on the basis of GDP and financial system. Based on a newly
constructed data set, this paper examines financial structure for a cross-section of up to 150
countries. They use simple graphs, correlations, and regressions to illustrate the relationships
between financial structure and economic development. They provide empirical evidence on the
potential legal, regulatory, and policy determinants of financial structure. This is the first
systematic examination of financial structure and economic development for a large cross-
section of countries since Goldsmiths (1969) influential book. It should be noted, however, that
this paper does not examine whether financial structure whether the country is bank-based or
market-based imposing a causal influence on economic growth and firm performance. Levine
(1999) and Demirguc-Kunt and Maksimovic (1999) conduct these analyses in companion papers.
Rather, this paper presents stylized facts concerning the relationship between financial structure
and economic development and the links between financial structure and legal, regulatory, and
policy determinants for a broad cross-section of countries. More specifically, they provide
international comparisons regarding three issues.
economic development and bank, nonbank, and stock market development,
economic development and bank-based versus market-based systems,
the legal, regulatory, tax and macroeconomic determinants of financial structure.
To analyze financial structure, they classify countries as either market-based or bank based. We
construct a conglomerate index of financial structure based on measures of size, activity and
efficiency. Specifically, they studied ratios of banking sector development (measured in terms of
size, activity, and efficiency) relative to stock market development (also measured in terms of
size, activity, and efficiency). Countries with larger ratios are classified as bank-based. Countries
where the ratio of banking sector development to stock market development is below the mean
are classified as market-based. Thus, this grouping system produces two categories of countries:
bank-based and market-based. Uncomfortably, this method identifies countries as bank-based
even though their banking systems are poorly developed by international comparisons. This
occurs because their stock markets are very underdeveloped by international standards.
Similarly, this method identifies countries as market-based even though their markets are
underdeveloped by international comparisons because their banks are extremely underdeveloped.
Consequently, we develop another grouping system where we first identify countries with highly
underdeveloped financial systems. A countrys financial system is considered underdeveloped if
it has below median values of both bank and market development. This produces three categories
of financial structure: underdeveloped, bank-based, and market-based. While this classification
system also has problems, it helps in comparing financial structures across a broad cross-section
of countries because very underdeveloped financial systems have more in common with each
other than with better-developed financial systems that fall into either the bank-based or market-
based group.
Financial system of Bangladesh:
The financial system of Bangladesh has a Bangladesh Bank as the central bank, 4state-owned
commercial banks, 4 government-owned specialized banks, 30 domestic private commercial
banks, 9 foreign commercial banks and 29 non-bank financial institutions. 2 specialized
commercial banks named Bangladesh Shilpa Rin Shangstha (BSRS) and Bangladesh Shilpa
Bank (BSB) merged and started functioning as Bangladesh Development Bank Limited (BDBL)
from January 2010. The financial system has also Investment Corporation of Bangladesh (ICB),
House Building Finance Corporation (HBFC), Securities and Exchange Commission (SEC) as
the regulator of the capital markets, 2 stock exchanges, insurance companies, micro-credit
organizations and co-operative banks. The banking sector is the most powerful sector in the
financial system of Bangladesh. The regulatory and supervisory arrangements for these entities
are well defined, with strong legal control. Then we can say Bangladesh is a bank based financial
country.
Banking sector:
The Bangladesh banking sector has done improvement in banking industry and they have
contributed fairly in our economy. Their positive growth has seen in previous year and they also
contributed a great economic flexibility in our economy. Their asset growth and low loan
indicate Bangladesh banking sector is in a favorable position.
BDT 3.99 million provision shortfall was reduced at the calendar year 2010. Only one
specialized commercial bank and 3 domestic private commercial bank incurred provision
shortfall and other all bank was flexible in credit risk option at the year 2010 according to
financial stability report. This is also signaling good news for banking industries growth.
Deposits is the main source of bank and its the main back up and earning power of a bank which
bank has huge deposits these banks profit is more because of it has a flexibility to invest. In this
side, banks of Bangladesh position were good except few. Because of fully insured depositor,
deposits rate was decreased then Bangladesh bank suggest banks for pay reasonable rate to keep
on the saving interest of depositors.
According to financial stability report, Banking sector operating profit and net profit increased
by 47.03 percent and 53.80 percent respectively in calendar year 10. The Return on assets (ROA)
and return on equity (ROE) increased to the rolling net profit, reaching levels of 1.72 percent and
19.89 percent respectively in calendar year10. Overall interest income increased proportionately
more than interest expense, resulting in a surge in net interest margin which favorably affected
the sector's profitability in calendar year10. The rise in asset turnover ratio and net interest
margin were instrumental in the increase in profitability ratios. The asset turnover ratio and the
net profit margin was 5.90 percent and 3.05 percent in 2010. This data suggests that this calendar
year create a huge amount profit and also liquidity but misuse of those create liquidity problem
later. Some liquidity problem was faced at the end of 2010 by the interbank money market.
However, the appropriate decision of Bangladesh Bank and their policies let them safe from this
problem. Bangladesh Bank suggests them to monitor asset liability mismatch when they have
been taking decision.
According to financial stability report, overall credit-deposit ratio as at end-December 2010 was
at a tolerable level, investment in call money market decreased by 11.61 percent while
borrowings increased by 30.96 percent in calendar year 10 compared to calendar year 09.
Because of excess cash, banks were using their cash in secondary stock market and secondary
market crush reduce their cash then they fall in liquidity crisis still they have to face this crisis
and Bangladesh Government also took loan from them.
Most bank of our country was found that they maintain capital adequacy ratio according to Basel
2. Risk weighted assets of banking sector contain credit risk, market risk and operational risk. As
of end December 2010, credit risk weighted assets was nearly 85 percent of total risk weighted
assets, followed by operational and market risk weighted assets. According to December 2010
financial Stability report, most of the banks maintained the required minimum capital adequacy
and Basel Tier-1 ratio. A growing trend of this ratio indicates the fair financial position.
However, a cross-country scenario of capital adequacy suggests that the Bangladesh banking
sector still far away from our neighbor countries like Srilanka, India and Pakistan
As go through the Financial Stability report we could see that banks were restricted that they can
hold only 10 percent of their liabilities. In terms of banks' liabilities, at the end December 2010,
the total coverage was nearly 6.0 percent as against the ceiling. 9 commercial banks having 16%
of asset was cross the ceiling. Because of free capital, Banking Industries growth was upward
because free capital absorbs losses. However, a majority of the banks maintained a leverage
ratio (equity/asset) lower than 10 percent implying that there is still chance for them to improve
their financial soundness because they have low default risk. Low leverage ratio is another signal
of banking growth.

Islamic banks are playing a significant role in the banking sector of Bangladesh. They are
holding major portion of banking and they also significantly shows growth in banking side.
Among those banks, Bangladesh Islamic Bank is the largest and high profitable bank in
Bangladesh. According to Bangladesh Bank report, a proportion of the overall banking industry,
the combined share of 7 Islamic banks (excluding Islamic banking branches/windows of
conventional banks) was 15.11 percent in assets, 17.95 percent in investments (loans), 16.32
percent in deposits, 13.05 percent in equity and 15.30 percent in liabilities as of end-December
2010. A majority of Islamic banks maintained a capital adequacy ratio significantly higher than
the industry capital adequacy ratio Islamic banks' classified investments to total investments ratio
of 3.48 percent showed a relatively good position as compared with 7.05 percent for the overall
banking sector in calendar year 10.
Non-Bank financial institutions:
Non-bank financial institutions are an important part of the Bangladesh financial system. This
sector has also shown growth in previous year. They borrow from banks and financial institution
and invest in capital, term and other deposits. Bank holds the major bonds and debentures which
are issued by Non Bank Financial Institutions then they have to rely on banks. Their ROE and
ROA show growth of their sector. They made best use of their fund thats why their growth has
been seen. So their improvement felt a positive impact on our economy.
Capital market:
Capital market sector also has done growth in last year according to Bangladesh bank data.
Interest rate on deposits and savings had been reduced due to low investment activities. Banks
and other financial institution holds the major portion of capital market almost one third of the
capital market rather than manufacturing area. Bangladesh has two stock exchanges Dhaka Stock
Exchange and Chittagong Stock Exchange. Dhaka is the larger among them. Ordinary people are
entering in capital market and they create unstable situation because they are not such conscious
about market they just want to make a profit thats why now stock market situation is volatile
because they are creating bubble in stock market they only judge by few information.
Bangladesh government is trying to create stable situation in market and they already had taken
much steps. Security Exchange Commission is initial regulation body of stock market but they
are failed to solve the current situation and Bangladesh Bank are also trying to solve this problem
by creating regulation on bank and other financial institution. Bangladesh bank tells the banks
A. To establish separate subsidiaries in the form of either merchant bank or brokerage
house or both in order to continue their brokerage/merchant banking activities.
B. Not to provide any margin loan.
By this time, 25 banks have established separate merchant bank/brokerage house and 1 bank is
under process.
Conclusion:
So financial system is important part of economy but market base or bank base it doesnt matter
cause for better development both are necessary because both are interrelated. Except one
country never grow rapidly and not possible to be developed country. Bangladesh is bank based
country and Bangladesh banking sector is also showing growth in banking sector but still some
lacking are available like improper use of liquidity. Capital adequacy proportion is growing but it
has to grow more. But Bangladesh capital market is very low so it has to be brought larger
change. Our country has few manufacturing company so importing is larger sector than export.
For better development we need to increase export then income also grow up then banks shall be
more developed than more rich then they compete with other foreign banks. Bangladesh bank
sector still doesnt enter in foreign competition because liquidity short. So better enrichment is
possible when both bank and capital sectors growth is possible except one development is never
possible.












References:
Demirguc-Kunt, Asli; and Levine, Ross. Bank-Based & Market-Based Financial
System: Cross-Country Comparisons, June 1999
IMF Country Report No. 10/38, February2010
Chakraborty, Shankha and Ray, Tridip Bank-based versus Market-based Financial
Systems: A Growth-theoretic Analysis
Sigurt Vitols The Origins of Bank-Based and Market-Based Financial Systems:
Germany, Japan, and the United States, January 2001
Levine, Ross. Financial Development and Economic Growth: Views and Agenda,
Journal of Economic Literature, June 1997, 35(2), pp. 688-726.
North, Douglass C. (1981), Structure and Change in Economic History, New York, W.
W. Norton.
Allen, Franklin and Douglas Gale (2001), Comparative Financial Systems: A Survey,
mimeo, New York University.
Bangladesh Bank (October 2011) Financial Stability Report 2010,