Financial institutions play an important role in the economic development of a country. The objective of these institutions is to accumulate the scattered deposits and invest them in a productive manner for economic upliftment. The financial market is created to satisfy particular preferences of market participants. These markets transfer funds from those who have excess funds to those who need funds. That is, they facilitate the transfer of funds from surplus units to deficit units.
Because the funding needs vary among deficit units, various financial markets have been established. The primary market allows for the issuance of new securities, while the secondary market allows for the sale of short-term securities; the capital markets facilitate the sale of long-term securities. The main participants of financial markets can be classified as households, businesses and government agencies. These participants who provide funds to the financial market are called surplus units. Households are the main type of surplus units. Participants who use financial markets to obtain the funds are called deficit units.
Bangladesh is a country that suffers from immense social, political, economic and environmental factors, and these issues need to be addressed for the overall development of the country. However, economic development is one of the prime areas, which can resolve many of the country's current problems. The growth of businesses in the market economies has created great opportunities for Bangladesh in furthering development. Economic development refers to changes that affect a local economy's capacity to create wealth for local residents (Kane & Sand 1988). The socio-economic development means simultaneous development in both social and economic aspects of a country. Socio-economic development of Bangladesh can be identified through a number of social and economic indicators, including GDP growth, poverty issues, employment, healthcare, environment, education, trade and commerce etc. The banking sector is playing a significant role in the development of the country.
The financial market can be classified into two categories:
MONEY MARKET
Money market is an integral part of the financial market of a country. It provides a medium for the redistribution of short-term loanable funds among financial institutions, which execute this function by selling deposits of various types, certificates of deposits and discounting of bills, treasury bills etc. The participants in the money market are the central bank, commercial banks, the government, the finance companies, contractual savings institutions like pension funds, insurance companies, savings and loan associations etc. The instruments that are generally traded in the money market constitute treasury bills, short-term central bank and government bonds, negotiable certificates of deposits, bankers' acceptances and commercial papers like the bills of exchange and promissory notes, mutual funds etc.
The money market in Bangladesh is in its transitional stage. The various constituent parts of it are in the process of formation; continuous efforts are being made to develop appropriate and adequate instruments to be traded in the market. At present, government treasury bills of varying maturity --- Bangladesh Bank Bills and Certificates of Deposits etc. in limited supply, are available for trading in the market. The role of the financial market and institutions in the economic development of Bangladesh vis-à-vis the banking sector has triggered a tremendous growth since Liberation.
In 1999, a total of about 6000 branches of the scheduled banks provided short-term credit throughout the country in the form of cash credit, overdraft and demand loan. The rates of interest are determined by the individual banks and as such the market is quite competitive. Each bank maintains its liquidity, and supply of funds is arranged throughout the country with the help of a network of branches. Bangladesh Bank (BB) as central bank of the country exercises its role in this market through the use of instruments such as bank rate, open market operations and changes in statutory liquidity requirements. The money market of Bangladesh goes through a series of changes and evolution. Initially, after Liberation, the money market was the major constituent part of the financial market of the country.
CAPITAL MARKET
Capital market, realistically, is the group of inter-related markets, in which capital in the financial form is lent or borrowed on medium and long terms; and, in cases of equities, on unspecified periods. The capital markets, different from the other parts of the financial market, that is, the money market, are those comprising long-term government securities, corporate bonds, stocks, municipal bonds issued by the state and local government units, and mortgages. Industry and commerce as well as the government and local authorities raise capital from the capital market, which performs several important functions in the process of economic development. Most important among them are the promotion of savings and investment and efficient allocation of funds for competing uses.
Participants in the capital market are many; They include commercial banks, savings and loan associations, credit unions, mutual savings banks, finance houses, finance companies, merchant banks, discount houses, venture capital companies, leasing companies, investment banks, investment companies, investment clubs, pension funds, stock exchanges, security companies, underwriters, portfolio managers, and insurance companies. The growth of the capital market in Bangladesh has been very slow because of the highly regulated economic regime and market imperfections. Long-term funds required by industrial enterprises were generally provided by government-owned development finance institutions (DFIs) at concessional and directed interest rates.
The banking sector of Bangladesh comprises four categories of scheduled banks. These are state-owned commercial banks (SCBs), state-owned development financial institutions (DFIs), private commercial banks (PCBs) and foreign commercial banks (FCBs). Total deposits of the banks in 2012 rose to Taka 5396.0 billion from Taka 4509.7 billion in 2011 showing an overall increase of 19.7 per cent.
As part of social responsibility, every bank has to participate in CSR (Corporate Social Responsibility) activities. Total annual direct CSR expenditure of banks appears to have stabilised in 2011 following sharp increases in three years up to 2010, apparently due to incompleteness of reporting in the earlier years.
Besides direct expenditure in CSR initiatives, banks have continued enthusiastic engagement in the ongoing financial inclusion campaign launched by the BB, reaching out with financial services to the excluded population segments and underserved economic sectors. The initiatives include extending branch and ATM networks into rural areas, mass-scale opening of no-frills bank accounts with nominal deposits for poorer people (about ten million such new accounts opened by now), adopting new cost-saving remote delivery modes for financial services like mobile phone/smart card-based banking, agricultural and SME (small and medium enterprises) financing, financing schemes for renewable energy generation projects and so forth. BB has supported these initiatives by putting in place necessary enabling infrastructure, including a fully automated inter-bank clearing and settlement platform for paper-based and electronic payment instruments, an upgraded online credit information bureau, and some refinance lines for banks against their SME and environment-focused lending.
The landless sharecroppers who were otherwise deprived of institutional credit are now financed by banks. Under this scheme, about Taka 3.1 billion was disbursed among 2, 70,802 sharecroppers till date. To make the agriculture inputs available and agriculture credit disbursement easy among the farmers, 18.2 million agro-input assistance cards have been distributed across the country and savings accounts of almost 10 million farmers have been opened accepting Taka 10 only as an initial deposit.
In SME financing, banks have focused on clusters of specific activity areas like light engineering and agricultural tools, handicrafts and handloom weaving, Agar harvest, Chatal business, maze farming, cattle rearing, biogas generation, solar energy etc. Banks are disbursing credit for different bio-gas schemes to meet the energy requirements of rural households. Such a project produces organic fertilisers for higher yields from crops and horticulture increasing milk and meat production to meet nutritional requirements of the population.
To redress electricity and gas deficiency through using environment-friendly alternative energy sources and for maintaining natural stability and preserving public health, banks have started financing for solar panels in remote rural areas of the country.
Banks are financing projects for energy generation from bio-mass processing (cow dung, poultry waste, garbage etc). One of the banks has financed the first Compost Plant under CDM.
Some banks have specially designed projects for the vulnerable areas affected by climate change.
Out of 47 scheduled banks, 40 banks have formulated their own Green Banking Policy Guidelines. Banks have allocated Tk. 5252.07 million in their annual budget, comprising allocation of (i) Tk. 5052.59 million for Green Finance other than financing the projects having ETP (ii) Tk. 194.35 million for Climate Change Risk Fund and (iii) Tk. 5.13 million by MTBL and DBBL for marketing and capacity building for green banking. Since projects having ETP fall under green financing, the total allocation of the annual budget for green banking, in fact, will be Tk. 10902.15 million.
Gender discrimination remains a core problem in many countries and is a key constraint to economic growth and improvements in social indicators. One key sphere where gender issues directly impact on productivity and growth relates to the low levels of female participation in the labour force. In this regard, Bangladesh Bank, with a goal of promoting gender equality, sought data from banks on various gender-related policies and staffing.
To promote cost-effective expansion of off-branch banking services, 28 banks have obtained mobile banking licences. Out of them, 19 have started operation, offering basic banking and financial services such as payment of inward and local remittances, withdrawal and deposit of cash from bank branches, payments of utility bills, payments for purchasing goods and services, payments of salaries of corporate officials, industries and factories and other offices, payments of allowances and pensions, fund transfers, immediate mobile balance recharging and so forth. It is remarkable in the history of Bangladesh that there is a transaction of Tk 2.50 billion every day through mobile banking. The country is currently ranked 7th in mobile banking in the world. Mobile banking accounts have soared to 10.92 million. Bangladesh has already achieved international recognition in mobile banking.
Financial institutions also have been contributing to meeting the fiscal deficit of the government.
The financial institutions have long been contributing to the socio-economic development of the country. In poverty reduction and employment generation, their role is remarkable. Financial institutions have a multiplier-effect in the economy. Corporate governance and government cooperation is required to facilitate this sector.
The writer is Lecturer, Bangladesh Institute
of Bank Management (BIBM), Dhaka.
© 2024 - All Rights with The Financial Express
