The Joint World Bank and IMF Financial Stability Assessment Program (FSAP) has just published its latest report on Bangladesh’s financial sector. Since 2003, when the last FSAP was published, Bangladesh’s financial sector has been improving steadily. Non-performing loans have decreased steadily throughout that time, while the total assets of banks doubled and credit given to the private sector has increased three-fold.
Nevertheless, the increasing risk that is associated with this kind of robust–perhaps overly rapid–growth threatens to weaken the system. Hence, Bangladesh’s regulatory framework will likley have to be strenghtened.
Moreover, the kinds of practices that are legion in the financial sector in Bangladesh promise to increase the vulnerabilities of the financial sector. Because bank capitalization, loan classification and provision is uneven across banks, favorable or even populist government intervention, like direct credit to favored banks and interest rate ceilings to favored sectors of the economy threatens to reduce Bangladesh’s financial stability. Private banking practices such as non-transparent transactions and imperfect information further threaten to erode international confidence in Bangladesh’s financial system.
According to the report,
“Stress tests suggest that credit risks continues to have a larger impact relative to other single-factor shocks…since the country relies heavily on remittances and exports, a protracted global economic slowdown could affect banks asset quality. Although financial soundness indicators are generally favorable, the asset quality of commercial loans portfolios remains weak, with a large share of loans classified in the substandard, doubtful, and loss categories. Despite, the major improvements resulting from Bangladesh Bank’s restructuring program including the corporatization of state banks, they remain financially weak.”
Interestingly, some of the risk the report discusses stems from what some international observers might suppose a welfare increasing program: micro loans financed by micr-finance institutions (MFI) like the Grameen Bank. These banks are entering into markets that were traditionally served by state banks. Now though MFI’s are taking on the risk and are getting loans repaid, managerial and regulatory capacity is lagging behind. Moreover, financial instruments that have done so much to roil the U.S. banking sector have penetrated into Bangladesh’s financial sector. The risk that those instruments pose has not been satisfactorily priced in the market.
In sum “despite some progress the supervisory system falls short of international standards and significant risks and vulnerabilities still exert pressure on financial sector stability.”
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