A big chunk of money still stays stashed outside the banking system although the situation has improved to some extent, says central bank's latest report, as uncertainty still persists.
People familiar with the development on the financial market told the FE that this rise is due to the uncertainty both in local and global markets as they believe people hold cash at a time when uncertainty arises.
However, in economic jargons, currency outside the banking system is defined as legal tender in the hands of members of the public, which has ballooned in volume in Bangladesh in recent months, as figured out from the currencies in circulation.
The volume is reported nearly 24.2 per cent or approximately Tk 2.6 trillion as of January 2023 over its corresponding period a year earlier, according to the Bangladesh Bank report approved Sunday.
In December, this was 27.27 per cent, amounting to nearly Tk 2.7 trillion.
Usually, it remains within a growth bracket of 12 to 13 per cent, as can be seen in June 2022 over its corresponding period a year before. It is found 12.85 per cent between June 2021 and June 2022.
The total deposit growth had been on a slide, dropping to 6.14 per cent in January 2023 year on year, the central bank data show. The deposit consists of both time deposit and demand deposit. Such total deposits were approximately 9.0 per cent in June 2022 over its corresponding period in 2021.
There are different views about the problem, ranging from the hoarding of currencies as 'mattress money'.
Many believe many depositors have withdrawn money on grounds of scams in shariah-based banks. The situation was so worse that the central bank acted as a "last resort of lending" at the end of December to some Islamic banks.
On the other hand, others argue that inflationary pressures and uncertainty in the economies (local and overseas) forced them to hold money in cash.
They, however, think some development took place due to the raise in the deposit rates-through the lifting of caps.
Many banks have been now collecting deposits offering higher interest rates after the announcement of the monetary policy statement wherewith the 6.0-percent cap on deposits has been withdrawn.
"The overall situation on deposits may improve gradually as the central bank has taken different measures, including the withdrawal of cap on deposit," a central banker said.
He also hopes the IMF loan also would give some sort of relief for many.
Talking to The Financial Express, Chairman and Founder of Policy Exchange of Bangladesh Dr M Masrur Reaz said the increase in money circulation outside bank deposits could be attributed to the panic withdrawal by some depositors due to the disclosure of several recent banking irregularities.
"The drop in bank-deposit growth also reflects the higher cost of living, forcing the middle class to make greater use of their savings and a higher level of spending out of their income," says the economist.
He also focuses on another downside of the money accumulated in private coffers -- splurge on consumption and resultant spur to inflation.
Dr Shah Md. Ahsan Habib, a professor at Bangladesh Institute of Bank Management [BIBM], terms it a good indicator of the existing high inflation and the uncertainty in the local and global economies.
"People hold cash at a time when uncertainty arises in the economies," he said, adding: "We cannot say that uncertainty has been zero, so people will hold the cash."
But, he quipped, the money outside the banks because of inflation wouldn't come back, as price rises have gobbled it up.
On the other hand, "The higher growth rate of currency outside the banking system may push up the inflationary pressure on the economy," says Mustafa K Mujeri, executive director of the Institute for Inclusive Finance and Development.
Mr. Mujeri, also former chief economist of the Bangladesh Bank, suggests that the policymakers take effective measures to decrease 'incentives' for holding cash.
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