Bangladesh has increasingly moved towards a market-based economy since the mid-1970s, as a result of receiving assistance under structural adjustment programmes of the World Bank, IMF and other donor nations. Despite foreign assistance, poor governance remains a big challenge for us. It is observed that both internal and external factors such as politics, public pressure and donor country’s conditions on reform are slowly generating a paradigm shift towards good governance and sustainable development. However, the paradigm shift towards good governance needs to pick up more speed to establish Bangladesh as a globally competitive nation.
It has been almost 53 years since our country got its independence, but it did not achieve any significant result in governance. The core challenge lies in developing a governance model that fits the current economic and political conditions. The other major bottlenecks are its slow monolithic and non-transparent bureaucratic structure. In addition, politicisation, favouritism, nepotism and corrupt practices in the recruitment, posting and promotion of government employees are contributing to bad governance. Strong political wills to fight against corruption, ensure accountability, transparency and establish the rule of law has become imperative for establishing good governance. In addition, a pro-people approach by strengthening the local government system is a must to achieve the goal of good governance.
Present State of Governance
Governance of an economy embraces all macroeconomic, microeconomic and fiscal policies, public economic agencies, regulatory bodies, company laws and legal institutions connected with economic matters. The poor policies, weak institutions, out-dated colonial laws and inefficiency of the administration resulted in creating conditions for weak governance. Poor governance stifles and impedes development. A landmark study by the World Bank found that where there is sound country management, an additional one per cent of GDP in aid translates into a one percent decline in poverty and a similar decline in infant mortality – whereas in a weak policy and management environment aid has much less impact. Findings like this clearly indicate that the ‘returns’ from development assistance are generally greater in developing countries characterised by good governance. One element of good governance that is needed for sustained development is an economy that operates in an ethical, accountable and appropriately regulated environment, which facilitates competition in the marketplace. Without this, there will be no driver for economic growth and sustainable development will not be possible. A dynamic private sector, operating in a properly functioning competitive market system, creates jobs and income, generates wealth and helps ensure that resources are used efficiently.
It is needless to say, Bangladesh is far away from achieving good governance. What is going on in this country can’t be termed as democracy, the power of the government is limited to a few powerful persons and more importantly personal or party interest is greater to them. Although the expectation of the country’s people is not so high, their fulfilment is still beyond imagination. People living here only want the assurance of the basic needs of the people i.e. food, shelter, clothing, education, healthcare.
The Financial Sector
The financial sector in Bangladesh comprises the money and capital markets, insurance and pensions, and microfinance. In addition to the Bangladesh Bank (BB), there are four state-owned commercial banks (SCBs), state-owned specialised banks, domestic private commercial banks (PCBs), foreign commercial banks and nonbank financial institutions (NBFIs). While the BB has regulatory and supervisory jurisdiction over the entire banking sub sector as well as the NBFIs, the Securities and Exchange Commission (SEC) serves similar functions for the stock exchanges and the merchant banks. Most of the institutions in the financial sector are characterised by a mix of public and private ownership.
However, this sector needs massive reform with a view to improving the regulatory and governance environment and enhancing the ability of bank owners, management and regulators. The reform programme aims to (i) give greater autonomy to the Bangladesh Bank, (ii) strengthen the Bangladesh Bank’s capabilities and technical skills to perform its enhanced responsibilities (iii) strengthen prudential regulations and supervision, (iv) restructure the management and internal processes of SCBs and ultimately privatise selected SCBs and specialised banks, (v) strengthen the legal and judicial processes (vi) improve the money and debt markets.
The capital market development programme should be designed to achieve (i) stronger market regulations and supervision, (ii) improved capital market infrastructure, (iii) modern capital market support facilities, (iv) increased supply of securities in the capital market, and (v) increased institutional demand for securities. The reforms needed to increase the supply of securities and develop institutional demand have progressed slowly, due mainly to a lack of government commitment and a shortage of competent staff.
Financial Sector Development and Issues
The financial sector strategy is based on four interlinked pillars: (i) governance, (ii) support infrastructure, (iii) market and (iv) human resource and capacity building. The governance pillar concerns the legal and regulatory framework, market transparency and disclosures, and market-based policies and processes among market institutions. Integrated consideration of all four pillars will also prevent any strategic action from being isolated from reality.
A resource gap exists in Bangladesh, although it is slowly decreasing. It is needed to accelerate domestic resource mobilisation efforts and to improve the investment environment, peculiarly to foreign investors. The financial sector has to gain the confidence of investors, establish and develop a network of financial intermediaries, and produce a wide range of diversified saving and financing instruments that meet market needs. The government should compete for funds on a market basis. Besides, Bangladesh’s financial structure by banks and SCBs poses a vulnerability to the overall financial system.
There are unhealthy banks that pose a serious threat to the stability of the overall financial system. Devoid of an efficient capital market, banks were encouraged to take on additional risks other than credit risks, mostly in the form of politically driven loans. The government caters to services with easy loans, and this has drastically escalated public sector borrowing from the banking system.
Government’s Financial Sector Strategy
To fulfil the vision of poverty reduction, four strategic blocks are identified by the National Poverty Reduction Strategy: (i) enhancing pro-poor growth, (ii) boosting critical sectors for pro-poor economic growth, (iii) devising effective safety nets and targeted programmes, and (iv) ensuring social development. The framework also identifies the following four supporting strategies or concurring issues: (i) ensuring participation, social inclusion, and empowerment of all sectors, groups, and classes of people; (ii) promoting good governance by ensuring transparency, accountability, and rule of law; (iii) providing service delivery efficiently and effectively, particularly to the poor; and (iv) caring for the environment and sustainable development on a long-term basis. The first three of the four strategic blocks require the financial sector to play a pivotal role in accelerating poverty reduction. To create an enabling macroeconomic environment for pro-poor growth the following are important: (i) The financial sector must play a crucial role in achieving higher productivity by improving the allocation of investment funds and strengthening the incentive framework and driving technological innovation, and eventually in increasing employment. (ii) Monetary policy has to be underpinned by a sound and efficient financial system. (iii) The National Poverty Reduction Strategy pays special attention to two aspects of capital market operation: raising funds in a cost-effective manner and enabling small savers to gain access to investment opportunities. (iv) To facilitate fair and competitive business, the financial sector, including SCBs and microfinance, must be properly reformed and supportive credit policies need to be established. The second strategic block is closely linked to the first strategic block. The financial sector can boost critical areas for pro-poor economic growth such as SMEs in rural areas. Setting up an appropriate credit guarantee system for lending and enlarging the base of conduit lending institutions, will benefit SMEs.
Financial sector reforms need to be complemented by parallel reforms to ensure financial sector development. Parallel reforms would encompass (i) private sector development; (ii) good governance, particularly in enhancing transparency and information disclosure and dissemination; and (iii) capacity building among the regulator, market participants, and professionals, including accountants and auditors.
To improve corporate governance and reduce political influence in Bangladesh’s financial sector, key strategies include: strengthening regulatory oversight by Bangladesh Bank, promoting independent board composition, enhancing transparency and accountability, implementing robust risk management practices, raising public awareness about financial ethics, and enacting stricter laws to limit political interference in financial institutions; all while focusing on building a strong culture of ethical conduct within the sector.
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The writer is Company Secretary, City Bank PLC.
