Creating a More Efficient Financial System: Challenges for Bangladesh

61 Pages Posted: 20 Apr 2016

See all articles by Thorsten Beck

Thorsten Beck

City University London - The Business School; Tilburg University - European Banking Center, CentER

Md. Habibur Rahman

affiliation not provided to SSRN

Date Written: June 1, 2006

Abstract

While Bangladesh has embarked on a path to reform its financial system, most prominently by privatizing its government-owned banks, the Nationalized Commercial Banks (NCBs), a sustainable long-term expansion of the financial system requires a more substantial change in the role of government. Using recent research and international comparisons, this paper argues that the government should move from its role as an operator and arbiter in the financial system to a facilitator role. This implies not only divestment from government-owned banks, but also de-politicization of the licensing process and a market-based bank failure resolution framework that focuses on intermediation and not on the rescue of individual institutions. Most important, the government should move away from the implicit guarantee for depositors and owners to applying the existing limited explicit deposit insurance for depositors, while simultaneously relying more on market participants to monitor and discipline banks instead of micro-managing financial institutions. This redefinition of government's role should not be limited to the banking system, but applies to other segments of the financial system, such as capital markets and the micro-finance sector, and should be seen as an essential element in the governance reform agenda and in the movement from a relationship-based economy to a market and arms-length economy.

Keywords: Banks & Banking Reform, Economic Theory & Research, Financial Intermediation, Investment and Investment Climate, Corporate Law

Suggested Citation

Beck, Thorsten and Rahman, Md. Habibur, Creating a More Efficient Financial System: Challenges for Bangladesh (June 1, 2006). World Bank Policy Research Working Paper No. 3938, Available at SSRN: https://ssrn.com/abstract=923245

Thorsten Beck (Contact Author)

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Tilburg University - European Banking Center, CentER ( email )

PO Box 90153
Tilburg, 5000 LE
Netherlands

Md. Habibur Rahman

affiliation not provided to SSRN

No Address Available