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Creating a more efficient financial system : challenges for Bangladesh

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  • Beck, Thorsten
  • Rahman, Md. Habibur

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.

Suggested Citation

  • Beck, Thorsten & Rahman, Md. Habibur, 2006. "Creating a more efficient financial system : challenges for Bangladesh," Policy Research Working Paper Series 3938, The World Bank.
  • Handle: RePEc:wbk:wbrwps:3938
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    References listed on IDEAS

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    Cited by:

    1. Corduneanu, Carmen & Iovu, Laura Raisa, 2008. "Multiplying financing choices through capital markets," MPRA Paper 12572, University Library of Munich, Germany.
    2. Carmen CORDUNEANU & Laura Raisa IOVU, 2008. "Steps in The Development of The Romanian Financial System and The Correlation with The Level of Economical Growth," Timisoara Journal of Economics, West University of Timisoara, Romania, Faculty of Economics and Business Administration, vol. 1(1), pages 83-108.
    3. Pirtea, Marilen & Iovu, Laura Raisa & Milos, Marius Cristian, 2008. "Dynamics of financial markets in the context of globalization," MPRA Paper 19889, University Library of Munich, Germany.
    4. repec:eee:ecmode:v:64:y:2017:i:c:p:567-588 is not listed on IDEAS

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    Keywords

    Banks&Banking Reform; Economic Theory&Research; Financial Intermediation; Investment and Investment Climate; Corporate Law;

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