Posted on 21st Dec 2024 12:12:04 AM Banking, Finance
1.1 Background
There is no denying the fact that the financial system plays a significant role in the economic development of a country. The importance of an efficient financial sector lies in the fact that, it ensures domestic resources mobilization, generation of savings, and investments in productive sectors. In fact, it is the system by which a country’s most profitable and efficient projects are systematically and continuously directed to the most productive sources of future growth. Financial sector of Bangladesh comprises with commercial banks, non-bank financial institutions, insurance companies etc. However, the banks and non-bank institutions play the key role in the financial system of Bangladesh. After liberation of Bangladesh in December 1971, all the financial institutions including the commercial banks carried out their operations in order to achieve the objectives of the government. This situation continued up to 1982. At that period, some regulations were formulated and some directions were made to the banks with a view to fulfill the economic objectives of the government rather than to fulfill the commercial interest of the banks.
In 1983, the Bangladesh Government initiated “ownership reform” program and allowed private commercial banks (PCBs) to start their business in the industry and to enhance the efficiency of the individual banks. At the same time, government decided to denationalize two NCBs. This initiative was not fully successful due to two major obstacles, namely the undue influence in the credit sanctioning process, and the absence of requirement to report loan classification and provisioning.
In the backdrop of the prevailing poor performance and weak capacity of the banks, the government was sincerely concerned to identify the major problems in the financial system. Later on, a number of reform measures were initiated broadly under the Financial Sector Reform Program (FSRP) and subsequently under Banking Reform Committee (BRC) and Commercial Bank Restructuring Project (CBRP).
1.2 Problem Definition
The performance of banks is important to the individual consumers of bank deposit and loan services, stockholders, employees, government regulators, management and to the entire economy. Broadly speaking, bank performance is important to individual consumers of bank deposit and loan services as well as to the performance of the entire economy.
The foremost question now is whether the reform measures taken were successful or not. It is a matter of argument regarding how far these reforms have been effective towards both the development of Bangladesh's financial sector and the improvement in the banks' performance, and what measures still need to be undertaken to eliminate the present impediments in the sector.
The study aims to examine the progress in the financial development in the country, and to compare and analyze the progress under the CAMEL framework, which considers "Capital
Adequacy, Asset Quality, Management Soundness, Earning performance and Liquidity".
1.3 Objectives of the Study
The broad objective of the study is to examine the reforms that took place in Bangladesh and to explore the financial implications of the reforms. Followings are the specific objectives of the study:
1.4 Scope and Limitations
This particular subject is extremely extensive in nature. To evaluate the effect of reform measures on the whole financial sector it is required to study both the banking and non-banking system as a whole. This research tried to concentrate only on the financial performance issues while evaluation of the reform measures also requires some other considerations. This particular study is extremely extensive in nature. Hard effort is given to make the study worthwhile and meaningful; even then, there exists some limitations.
Lack of appropriate measurement yardstick and complexity of interlinks of the reform measures among different parts of the economy and information availability constitutes one of the major limitations of this report. In addition, the financial information was collected from secondary sources and the accuracy could not be verified which may cause deviation from the reality if this information is inaccurate.
1.5 Presentation of the research
Chapter 1 discusses background of the study, objectives, scope and limitations.
Chapter 2 reviews relevant conceptual framework and literature review on banking reforms.
Chapter 3 reveals the methodology of research to evaluate the performance of banks.
Chapter 4 looks into the reform measures undertaken in order to remove the problems of the banking sector of Bangladesh and evaluates the impact of the reforms.
Chapter 5 concludes from the financial picture depicted in the study and provides some policy inferences for further development of the banking system in Bangladesh.
Abstract
The aim of this study is to summarize the major reforms undertaken in the banking industry of Bangladesh and to evaluate their impact on the financial development and individual performances of the banks. Development of financial system is measured by financial deepening, competitiveness and profitability within the banking industry. Individual Performances of the banks are measured by "Capital Adequacy, Asset Quality, Management Soundness, Earning performance and Liquidity" of the banks. The study reveals that the financial system in Bangladesh has been developed to some extent. However, we observe a mixed result for different types of banks in case of performance evaluation of the banks. While the local banks failed to achieve satisfactory improvement, the foreign banks were able to improve their performance considerably perhaps for having strong and efficient management, and additional compliance with the policy, guidelines, standards issued by their head office.
Keywords: Banking sector reform; Financial development; Bank performance; Competitiveness; CAMEL Framework
List of Acronyms
BBO : Bangladesh Bank Order
BCA : Bank Companies Act
BCD : Banking Control Department
BIS : Bank for International Settlement
BKB : Bangladesh Krishi Bank
BRC : Banking Reform Committee
BRPD : Banking Regulations & Policy Department
CBPASS : Commercial Banking Problem Analysis and Strategy Study
CBRP : Commercial Bank Restructuring Project
CIB : Credit Information Bureau
CRAR : Capital to Risk weighted Assets Ratio
CRGS : Credit Risk Grading System
CRR : Cash Reserve Requirement
DFIs : State-owned Development Financial Institutions
EPZ : Export Processing Zone
EWS : Early Warning System
FCBs : Foreign Commercial Banks
FSRP : Financial Sector Reform Program
SCBs : State-owned Commercial Banks
IAS : International Accounting Standard
MOU : Memorandum of Understanding
NBFIs : Non Bank Financial Institutions
NCBs : Nationalized Commercial Banks
NPLs : Non-Performing Loans
OBU : Offshore Banking Unit
OECD : Organization for Economic Cooperation and Development
PCBs : Private Commercial Banks
PPS : Performance Planning System
RAKUB : Rajshahi Krishi Unnayan Bank
RWA : Risk Weighted Assets
SBs : Specialized Banks
SLR : Statutory Liquidity requirement
SMA : Special Mention Account
WB : World Bank
Table of Contents
Acknowledgements
Abstract
List of Acronyms
Table of Contents
List of Tables
Chapter 1: Introduction
1.1 Background
1.2 Problem Definition
1.3 Objectives of the Study
1.4 Scope and Limitations
1.5 Presentation of the Report
Chapter 2: Conceptual Framework and Literature Review
2.1 Conceptual Framework
2.1.1 Defining Banking Sector Reform
2.1.2 Significance of Banking Sector
2.1.3 Why Financial Sector Reform?
2.1.4 Nationalization of the Banking System in Bangladesh
2.1.5 Privatization of the Banking System in Bangladesh
2.1.6 Current Structure of the Financial System in Bangladesh
2.2 Theoretical Framework of Financial Sector Reform
2.2.1 Financial Reforms in South Asia
2.2.2 India
2.2.3 Pakistan
2.2.4 Sri Lanka
2.2.5 Nepal
Chapter 3: Methodology
3.1 Research Methodology
3.2 CAMEL Rating
3.2.1 Capital Adequacy
3.2.2 Asset Quality
3.2.3 Management Efficiency
3.2.4 Earning Performance
3.2.5 Liquidity
Chapter 4: Banking Sector Reforms in Bangladesh
4.1 Instigation of Reforms
4.2 Financial Sector Reform Program
4.3 Brief Description of the Reforms
4.3.1 Policy Reforms
4.3.2 Institutional Reforms
4.3.3 Legal Reforms
4.4 Impact of Banking Sector Reforms: Empirical Evidences
4.5 Impact of Reforms to Financial Development
4.5.1 Financial Deepening
4.5.2 Competitiveness of the Banking Industry
4.5.3 Profitability of the Banking Industry
4.6 Performance Evaluation of Banks
4.6.1 Capital Adequacy
4.6.2 Asset Quality
4.6.3 Management Efficiency
4.6.4 Earning Performance
4.6.5 Liquidity
Chapter 5: Conclusions and Policy Inferences
5.1 Conclusions
5.2 Policy Inferences
Research, Report, Banking, Sector, Reform, Bangladesh, Impact, Bank, Conceptual, Framework, Financial, Nationalization, Privatization, Structure, CAMEL, Rating, Policy, Legal, Empirical, Evidences, Development, Deepening, Competitiveness, Industry, Profitability, Performance, Evaluation, Performance
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