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Contribution of Financial Sector to the Economic

Development of Bangladesh

Introduction
The existence of correlation between financial development and economic growth is well
established by the theoretical as well as empirical evidence.
The financial sector is all the wholesale, retail, formal and informal institutions in an economy
offering financial services to consumers, businesses and other financial institutions. In its
broadest definition, it includes everything from banks, stock exchanges, and insurers, to credit
unions, microfinance institutions and money lenders.
Economic Development refers to changes that affect a local economy's capacity to create wealth
for local residents. Economic development for Bangladesh can be identified through number of
indicators, including GDP growth, poverty issues, employment, healthcare, environment,
education, trade and commerce etc.
Bangladesh is a country suffering from immense social, political, economic and environmental
issues and these issues need to be addressed for the overall development of this country.
However, the economic development is one of the prime factors, which can resolve many of its
current problems. The growth of business sectors and open market economy has created a great
opportunity for Bangladesh for its development. The contribution of the financial and more
specifically the banking sector is playing significant role in the development of this country.

Overview of Financial system of Bangladesh


The financial system of Bangladesh is comprised of three broad fragmented sectors:
1. Formal Sector,
2. Semi-Formal Sector,
3. Informal Sector.
The sectors have been categorized in accordance with their degree of regulation. The formal
sector includes all regulated institutions like Banks, Non-Bank Financial Institutions
(FIs), Insurance Companies, Capital Market Intermediaries like Brokerage Houses, Merchant
Banks etc.; Micro Finance Institutions (MFIs).
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Among scheduled banks there are 4 nationalized commercial banks (NCBs), 5 state-owned
specialized banks (SBs), 31 domestic private commercial banks (PCBs), 9 foreign commercial
banks (FCBs) and 33 nonbank financial institutions (NBFIs) as of October 2014.
The semi formal sector includes those institutions which are regulated otherwise but do not fall
under the jurisdiction of Central Bank, Insurance Authority, Securities and Exchange
Commission or any other enacted financial regulator. This sector is mainly represented
by Specialized Financial Institutions like House Building Finance Corporation (HBFC), Palli
Karma Sahayak Foundation (PKSF), Samabay Bank, Grameen Bank etc., Non Governmental
Organizations(NGOs and discrete government programs).
The informal sector includes private intermediaries which are completely unregulated.

Figure 1: Overview of financial system of Bangladesh


Source: Bangladesh Bank

Economic Condition of Bangladesh


Bangladesh has faced severe economic problems in the past. However, over the past years, the
economic situation of Bangladesh seems to be improving. The capita income was USD $1190 in
2013-14. Annual average growth rate in per capita GDP was 5.0 in 2011-2013. Also there is a
change in economic structure. Previously in 1980, contribution in GDP included 33.2% from
agriculture sector, 17.1% from industry sector and 49.7 from service sector. Whereas in 2013 it
was 18.7% from agriculture sector, 32.0% from industry sector and 49.3 from service sector.
In 2013-14, savings were 30.54% of GDP and Investment was 28.69% of GDP. Inflation in
2013-14 was 6.78. Workers remittance in 2013-14 was BDT 110582.38 crore. Exchange rate in
2013-14 was stable with 2012-13, which BDT 77 pet USD.
In 2013-14 total FDI of Bangladesh was USD 1,730.63 million.

Contribution of financial sector to the economic development

Role Towards Employment Creation:

The financial, specially banking sector has significantly contributed it the employment
generation in Bangladesh. Banks have employed over 20,000 people directly and a few
million indirectly through financing in business including import-export,
industrialization, SME financing and Rural development projects. So, it can be
apprehended that a few million families are directly and indirectly benefited from banks
and they are also contributing in the economy as a part of the whole economic system of
Bangladesh.
Role in Earning Foreign Remittance:

Remittances by migrant workers earning sent back from the country of employment to
the country of origin, play a vital role in the economies of many labor sending countries.
Also remittance help in macroeconomic development process in the home country as the
remittance provide significant sources of foreign currency, increase national income,
finance imports and contribute to improve the balance of payment situation. Demand for
migrant workers' remittances to Bangladesh has now increased tremendously. FY 201314, remittance inflow to Bangladesh was 110,582.38 crore taka.
Role in Promoting Ecology and Green Banking:
Green Bank is simply with social awareness. Bangladesh Bank insists on going green to
help the environment that promote its online banking, Mobile Banking or the idea of
socially responsible investment funds for sustainable project finance activities. An
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important and easy aspect of green banking is online and investment in eco-friendly
business projects. A truly green bank will reduce its carbon footprint by building more
efficient premises, branches, implementing more efficient operational procedures
promoting sustainable banking and increasing their investments in environment-sensitive
industries.
Role in the Development of SMEs:
The role of Small and Medium Enterprises (SMEs) is indispensable for overall economic
development of a country particularly for developing countries like Bangladesh. Since
this sector is labor intensive with short gestation period, it is capable of increasing
national income as well as rapid employment generation; achieving Millennium
Development Goals (MDGs) especially eradication of extreme poverty and hunger,
gender equality and women empowerment. SME sector has played a vital role in
economic development of some prosperous countries of Asia. Our neighboring countries
have also given due importance on SME. Terming SME as employment generating
machine they stressed on SME development for higher economic growth, narrowing the
gap of income inequality and poverty alleviation. Besides the above,

Role in International Trade (Import/Export):


Banks play a key role in international trade by opening L/C, providing credit in different
forms as per client demand and thus facilitating the whole process. The progress of RMG
sector
wouldn't
be
possible
without
sincere
effort
of
bankers

Role in Perfoming Responsibility to the Society (CSR)


Banks spent a significant amount of there income in social wellfare, i.e. healthcare
program, education program, scholerships, sports, art and humaiterial assistance program

Conclusion
Today, almost everyone agrees that the financial system is essential for development of a
country. Improving the financial system can lead to higher growth and reduce the likelihood and
severity of crises. While Bangladesh has achieved relatively high economic growth over the past
years with a distorted financial system and in spite of its governance problems, cross-country
experience has shown the importance of financial and institutional development to sustain longterm economic growth. Faster GDP growth consistent with the poverty reduction goals cannot be
met unless the extent and quality of financial intermediation in Bangladesh advances
significantly. In particular, this would require more competitive banking and non-banking
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financial sectors capable of reaching out to all sections of the community, rural & urban, catering
to all types of marketable financial service. The pro-active measures taken in the financial sector
in recent years have put salutary impact on the financial system. Hopefully, the on-going reform
process in the financial system of Bangladesh will bring more stability and transparency. In this
regard, proper care should be taken in the reform process so that reforms in the financial sector
embrace the socio- economic realities in Bangladesh.

Bibliography:
1. Bangladesh Banks website and its various publications:
2. The Financial Express website
http://www.thefinancialexpress-bd.com

vied

on

10th

October,

2014

from

3. Md Habibur Rahman , "Financial Development-Economic Growth Nexus: A Case Study if


Bangladesh", Bangladesh Development Studies, Vol xxx, June-September 2004
4. The Importance of Financial Sector Development for Growth and Poverty Reduction, Policy
Division, Department for International Development
5. Shafiqur Rahman & Nicholas McDonald, "Economic Development of Bangladesh, The Role of
IBBL",
6. Small and Medium Enterprise Foundations website, viewed on 10t October, 2014 from :
www.smef.org.bd/
7. Dr. Salehuddin Ahmed, "The Road Map to Financial System Standards for Middle Income
Bangladesh"