Term Paper

On
“Contribution of Financial Sector for
Economic Development”

Submitted to:
Abu Naser Mohammad Saif
Assistant Professor
Department of Management Information Systems
University of Dhaka

Submitted by:
Asmaul Husna Tamanna
ID- 029-12-117
BBA 12th Batch, Section- A
Department of Management Information Systems
University of Dhaka

Course Name: Bank & Insurance Management

Date of Submission: December 11th, 2019

Letter of Transmittal
December 10, 2019
Mr. Abu Naser Mohammad Saif
Assistant Professor
Department Of Management Information Systems
Faculty of Business Studies
University of Dhaka

Dear Sir,
Here is the report on “Contribution of financial sector for economic development”
which you had us asked to prepare. ”.It reflects how financial sector, which includes
banks and insurance companies, of our country is affecting our economic progression.
While working on this report I have had several brainstorming sessions, study of relevant
literature and analytical reviews to make the report successful. I have also found the
actual objectives through making this report.

Sir, I would like to thank you for providing me with this opportunity. It has helped me to
gain a broader view of the financial sectors of our country. The attached report reflects
my attempt to deliver the best of my efforts and I hope that it lives up to your
expectations.

Sincerely,
Asmaul Husna Tamanna
ID-029-12-117
Section- A
Department of Management Information Systems
University of Dhaka

Executive Summary

The paper discusses the main functions of the financial sector of our country and their
role in the development of our economy. Any market economy requires the existence of a
proper financial system able to ensure the mobilization of available money and guiding
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them towards the pursuit of efficient economic activities so that the system plays an
important role in the economy of any country. Financial intermediaries like banks and
insurance companies play an active role for achieving that goal. They channel funds from
those who have savings to those who have more productive uses for them. They perform
financial services that reduce the costs of moving funds between borrowers and lenders,
leading to a more efficient allocation of resources and faster economic growth. Also the
insurance sector allows people to protect their families, livelihood from the financial loss
of unanticipated uncertain events. It promotes economic development by creating a safer
environment for investment and innovation. It enables calculated risk taking and drives
economic activity forward. It promotes the forward movement of progress. Thus, banks
and insurance companies are essential component for modern economy, not only in terms
of turnover, but also as the primary financier of the national economy. Using some
banking sector indicators such as money supply, domestic and private credit as financial
development indicator this study attempts to scrutinize the relationship between
economic growth and financial development. Per capita GDP has been used as a proxy of
economic growth rate and time series data over the period of 2011- 2019 has been taken
as sample period. Empirical evidence substantiated the unidirectional and bidirectional
causality between the financial development and economic growth in Bangladesh. In fact,
financial development is one of the prime causes for economic growth in short-term and
long-term dynamics. This study suggests ameliorating the financial system for economic
development. 

Table of Contents

Introduction………………………………………………………………...05
Analysis…..………………………………………………………………….07
Impact………………………………………………………………………...20
Recommendations and Conclusion…………………………………..21

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References…………………………………………………………………...24

Introduction

To understand why financial sector development may be positively related to economic

growth, it is necessary to understand the critical function the sector provides to the
economy. The financial sector is unique because of the risk and uncertainty faced by both
savers and investors. In order to perform their functions, banks provide a large array of
financial services to attract customers and to meet their demands. The Economist has
often described banks as intermediaries between savers and users of capital

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Banks are special intermediaries because of their unique capacity to finance production
by lending their own debt to agents willing to accept it and to use it as money. Being at
the same time borrowing and lending institutions, banks also offer other types of services,
such as: payments, settlements and funds transfer, foreign exchange transactions, savings
and investment services, payroll services, financial advice, investments and bill finance,
safe-deposit boxes. So as to provide these financial services, commercial banks perform
certain functions within the national economy: the function of deposit’ acceptance,
attracting temporarily available resources from business and individual customers; the
investment function, granting loans for those in need of financial support; the commercial
function that enables fund transfer between account holders determined by various
activities. Altogether, banks channel savings into productive capital, facilitate productive
use of surpluses to generate employment and promote economic welfare and provide
risk-free income to depositors.
The financial sector and its role in the process of economic development have attracted
notable attention over the last decades. A large body of theoretical literature exists on
financial system offering important contributions to the understanding of banks as key
determinants of economic growth. A number of researchers in the early and late 1990’s
(just to mention some: Diamond, Dybvig, Barro, King, Levine, Zervos, Pagano, Stieglitz)
and more recent studies (of: Bossone, Armenta, Gregoric, Kosak, Allen, Carletti,
Taghipour) concluded that financial development promote economic growth. Diamond
and Dybvig show how financial intermediaries can enhance risk sharing, which can be a
precondition of liquidity and can thus improve welfare. In their model, without an
intermediary (such as a bank), all investors are locked into illiquid long-term investments
that yield high payoffs only to those who consume at the end of the investment. Financial
markets can also transform illiquid assets into financial instrument (liquid liabilities).
With liquid financial markets savers/lenders can hold assets like equity or bonds, which
can be quickly and easily converted into purchasing power. Financial intermediaries
make longer-term investments more attractive providing different forms of finance to
borrowers.

Banks of Bangladesh

Bangladesh is a third world country with a under developed banking system, particularly
in terms of the services & customer care provided by the government run banks. Recently
the private banks are trying to imitate the banking structure of the more developed
countries, but this attempt is often foiled by inexpert or politically motivated government
policies executed by the central bank of Bangladesh, Bangladesh Bank. Bangladesh has
come a long way in its economic growth. From an average US$ 5.70 billion in 1972, the

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gross domestic product (GDP) increased to US$ 285.82 billion in 2018. The Bangladesh
economy is the 42nd largest in the world in nominal terms and 31st largest in terms of
Purchasing Power Parity (PPP). Recently, Bangladesh graduated from least developed
country (LDC) status to a lower middle income country, and hopes to become a
developed country by 2041.

11 banks are under the central bank of Bangladesh. Bangladesh Bank is the central bank
of Bangladesh. Bangladesh Bank was founded on December 16, 1971. It is a member of
the Asian clearing union. Bangladesh Bank Reserve 2.565 trillion BDT (UD$33 billion)
2018 update. The currency of Bangladesh is called Taka.

There are many types of banks such as state owned commercial banks, private banks,
private Islamic banks, specialized banks, foreign commercial banks etc. The state owned
commercial banks are- Janata Bank LTD, Sonali Bank LTD, Rupali Bank LTD, BASIC
Bank LTD, Agrani Bank LTD, and Bangladesh Development Bank LTD. Some
specialized banks are - Probashi Kallyan Bank, Bangladesh Development Bank LTD,
Bangladesh Krishi Bank , Palli Sanchay Bank, Grameen Bank, Progoti Co-operative
Land Development Bank LTD.

Insurance companies of Bangladesh

Just after independence, following a bitter and brutal war, the Government took over the
control and management of all the Pakistani Insurance Companies. Ultimately, the
insurance industry of Bangladesh was nationalized in August 1972. The weak insurance
industry of the country suffered a set-back. This is because the newly created Life
Insurance Corporation (Jiban Bima Corporation) had to take over the liability of all life
policies written by Pakistani insurers. As on 1-1-1973 the assets of Pakistani life insurers
taken over by the Jiban Bima Corporation (JBC) amounted to Taka 148 million against
total liabilities of Taka 264 million. Similarly General
Insurance Corporation known as Shadharan Bima Corporation (SBC) inherited assets of
taka 103 million against liabilities of taka 76.5 million. The Govt. of Bangladesh
promulgated an ordinance in 1984 to allow the formation of insurance
companies in the private sector. So fat 42 general insurance companies and 17 life
insurance companies have commenced business. No foreign company except American
Life Insurance Company (ALICO) has been allowed to operate in Bangladesh. ALICO is
the only foreign insurance co. operating in Bangladesh since independence and
transacting life insurance business throughout the country and enjoying the largest pie of
life market.
The British made Insurance Act, 1938 and the rules made there under are being
administered through department of Insurance (D.O.I) under Ministry of Commerce. The
D.O.I acts as the regulatory and supervisory authority of the insurance industry and is
headed by the Chief Controller of Insurance (a rank equivalent to and additional secretary

6
of the Government Civil Service). Compared with other sectors Insurance in Bangladesh
is still underdeveloped. The population of the country is currently approximately 35
million. Whereas total annual premium at present is Taka 12000 million only. In the
insurance sector, there is an acute dearth of qualified and trained people and also there is
lack of consciousness among the general public regarding the use and benefit of
insurance.

Analysis
Role of banks in economic growth
In the last two years, Bangladesh's economic expansion has been quite impressive from
the perspective of GDP growth rate, which was seven-plus percent both years, according
to figures from government and other sources. Yet, as data has revealed, and as experts
have overwhelmingly concurred, the growth rates could have been significantly higher.

This is no less down to the fact that Bangladeshis are innovative people; as evident from
the success that they are achieving in every type of scientific field all over the world,
even in the most competitive environments. Additionally, the number of working age
(particularly young) people currently in the country is the highest it has ever been, and
also the highest it will be for some time, creating for Bangladesh, that window of
opportunity—demographic dividend—to rapidly increase its overall production capacity
through the efficient incorporation of these people into the economy—as the free market
in theory, at least, is supposed to help achieve. Also helpful has been the fact that certain
markets are, slowly but surely, shifting to Bangladesh from other countries due to various
geo-economic and geo-political reasons, along with opportunities. Disappointingly,
however, data also shows that the fruits of whatever growth we have had, recently, have
gone largely to a small minority of our population. According to a government study
made public on October 17, 2019, for example, the poorest five percent of our population
has had their share of the national income reduced from 0.78 percent in 2010 to 0.23
percent in nine years. The richest five percent in contrast has had their share of national
income increase from 24.61 percent in 2010 to 27.89 percent in 2019.

And this is quite clear to see, as among the eight state-owned banks, 40 privately-owned
banks and nine foreign-owned banks, nonperforming loans (NPLs) stood at Tk 80,397
crore as of September 2019, according to Bangladesh Bank (BB) figures. That is 10.67
percent of all outstanding loans. And if restructured or rescheduled loans were included,
NPL in the banking sector goes up even more—a mammoth 17 percent of total
outstanding loans. Like previous years, state banks were again the worst performers last
year as NPL of the eight state-owned banks stood at Tk 44,126 crore or 55 percent of the
total.

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Put together, these banks also had a capital shortfall of Tk 12,683 crore at the end of June
2017, again, despite the government's most recent injection of Tk 2,000 crore using funds
it had received from taxpayers on top of the Tk 116.6 billion handouts it had given to
state-owned banks at taxpayers' expense between fiscal year 2011-12 (July-June) and
2018-19 according to its own data. Besides this form of continual wealth transfer from
the general public to the corruption-ridden and seemingly incompetent state-owned banks
(and ultimately to the defaulters), what is worrying economists and other experts further
is the fact that this problem in the banking sector has actually been getting worse in spite
of having prolonged for this long.

In many cases, the published data did not enable us to find out the disbursement trend of
the banks for various types of financing. The outstanding advance figures have been used
to indicate the extent of involvement in any particular sector/activity. However, the
increase or decrease of such figures cannot always be attributed to the real increase or
decrease of involvement of financing in any activity during a particular period due to no
repayment of principal and interest of loan amount fallen due as per schedule.
Nevertheless, an indicative picture may be drawn regarding the involvement of banks in
development financing on the basis of outstanding figures.

The sectors where banks are participating are discussed in brief below:

Share of Deposits and Advances

The nationalized and private commercial banks are the backbone of the financial
system of Bangladesh. Till now four NCBs dominate the banking sector. However, the
private banks (local and foreign) are growing and increasing their market shares.
Compared with the distressed nationalized banking sector, the growth of private banking
is a healthy development for a sound financial system . In 2017 the private commercial
banks' (PCBs) share in export finance was the highest (60 per cent) followed by state
owned commercial banks (SoCBs). Within the apparel sector, the RMG sector received
the highest proportion of financing from banks, and the volumes and proportions have
increased between 2014 and 2017. Import payments have been increasing over the years.
The total import payments (c & f), including imports of EPZ, increased more than two
times from US$21,629 million during 2007-08 to US$43,663.0 million during 2016-17.

Regional Distribution of Deposits and Advances

The mobilization of deposits from and dispersal of advances to the various regions
other than the geographical areas of traditional concentration reflect the policy of
following the balanced development financing approach.

Agricultural Financing

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Given the role of the agriculture in the economic development of Bangladesh, it is
imperative to invest considerable resources for agricultural development of the country.
The agriculture sector, the lifeline of the rural economy, which contributes about 30% to
the GDP of the country and constitutes the chief source of supply of food, is continuously
being deprived of the needed capital. Private Commercial Banks (PCBs) accounted for
the largest share of agricultural credit followed by Specialized Banks (SBs), State-owned
Commercial Banks (SoCBs) and Foreign Commercial Banks (FCBs) (Bangladesh Bank
Annual Reports). Between 2001-02 and 2017-18, the Bangladesh Krishi Bank's total
disbursement to the agriculture sector increased more than five times from BDT 15.63
billion to BDT 82.15 billion; and its total disbursement to the crop production sub-sector
increased by about 3.6 times from BDT 8.59 billion to BDT 30.62 billion. During FY17,
the SoCBs, PCBs, FCBs and SBs provided credit of BDT 210 billion, exceeding the
target of BDT 175.50 billion. The FCBs and the PCBs exceeded their targets by about 44
per cent and 36 per cent respectively.

Industrial Term Loans and Working Capital Financing

This is a new phenomenon in commercial bank lending in Bangladesh. Term loans are
designed to fund long and medium term business investments, such as the purchase of
equipment or the construction of physical facilities, covering a period of more than one
year. Bangladesh does not have a developed capital market. The bulk of the financing for
long-term investment is currently supplied by commercial banks as term loans. To ensure
adequate funding for SMEs, the Bangladesh Bank in 2010 formulated the "SME Credit
Policies and Programs" aimed at helping SMEs in achieving sustainable inclusive
growth. Under this program, the BB does not impose targets on commercial banks and
non-financial institutions (NBFIs); rather the targets are independently decided by them.
Since 2012, both the targets and actual disbursements have been increasing. During
FY17, while the target was BDT 1338.6 billion, BDT 1439.7 billion was disbursed by all
banks and NBFIs among 697,000 cottage, micro, small and medium sized enterprises.
Women-led entrepreneurs received special emphasis, with 49,000 of them receiving BDT
45.1 billion.
The BB has been encouraging all banks and NBFIs to grant loans to women
entrepreneurs at reduced interest rate (9 per cent). Also, it set up a dedicated women
entrepreneur desk and instructed all banks and NBFIs to do the same, reserve 15 per cent
of the SME funds exclusively for women entrepreneurs, provide credit to new women
entrepreneurs in this sector, and sanction loans of at least BDT 2.5 million to women
entrepreneurs with only personal guarantee but no collateral under its refinance facilities.
At the end of June 2017, BDT 20.3 billion was refinanced to 19,098 women-led
enterprises.

Financing for Infrastructure

Availability of infrastructure is one of the objective conditions of undertaking
development efforts in an economy. A well-knit transport and communication network
facilitates the quick movement of people and goods. Besides, increasing construction

9
activities comprising housing, office premises and other ancillary buildings are the
manifestations of development.

Role of Insurance in economic growth

Insurance is a risk financing mechanism. A well developed and evolved insurance sector
is a boon for economic development as it provides long-term funds for infrastructure
development and at the same time strengthening the risk taking ability of the country as a
whole. Insurance is also a strong development tool for countries looking to encourage
inclusive economic growth and socio-economic development. In Bangladesh, never in the
past, the earlier governments and or the regulators paid due attention as part of their
mandate to make insurance available to mass population. For the first time, much desired
“Insurance Policy” (Bima Niti) has been formulated with the realization that insurance
services be made available to different target groups as a major policy objective of the
government. It has been rightly observed in the “ Bima Niti” that a strong performing
insurance sector allows for the efficient management of risk through nurturing a culture
of risk management in every organization, (be it commercial or non-commercial) every
individual household and in every sphere of life. “Bima Niti” of Bangladesh is most
valuable document which need regular follow up and review to ensure socioeconomic
growth through insurance mechanism.

Within Bangladesh’s insurance sector, life insurance constitutes a 73.5% share of

its insurance market and non-life insurance a 26.5% share. Micro-insurance and
Islamic Insurance (Takaful) are also a part of Bangladesh’s insurance sector. In
2017, non-life insurers earned a gross premium income of Tk2, 908.1 crores and
life insurers Tk8, 203.1 crores.

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The assets of all the insurance companies stood at Tk44, 328 crores by the end of
2016. Investments in both life and non-life insurance companies have grown
significantly during the period between 2006 and 2014.

Yet, despite some growth, a comparison with other countries paints a dreary
picture. Overall, insurance penetration (insurance premiums as a fraction of GDP)
in Bangladesh was a meager 0.7% in 2016 and has mostly been on a downward
trend since 2009 (see Figure 1).  Figure 2 clearly indicates that Bangladesh’s life
insurance penetration rate falls behind those of several other developing countries.

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Compared to its South Asian counterparts, including India, Bangladesh has the
lowest premium per capita. According to the World Bank, from 1999 to 2004, the
average gross premium income as a percentage of its GDP was 2.7% in India,
1.27% in Sri-Lanka, but only 0.51% in Bangladesh. Egypt, which like Bangladesh
is one of the countries featuring in Goldman Sachs’ Next Eleven (N-11), has been
implementing regulatory reforms.
The way insurance companies has been participating in developing our economy
has been discussed in brief below:

Formation of capital & increase of investment:

Insurance companies receive premiums from insured persons. These premiums increase
national capitals. By investing these capitals, national productions increase.

Reduce of hindrance of risk: 

Every sorts of business consists of risks. These risks are more hazardous in Bangladesh.
Insurance companies minimize these risks by giving privileges on loss.

Maintenance of national wealth: 
Insurance companies not only secure financial facts, but also influence people to take
necessary steps to avoid risks.

Distribution of risks:
Insurance companies deal with lots of insured people. So risks are being distributed
among them.

Extension of business: 
By taking all uncertain business risk insurance companies extended the field of business
in our country. Insurance gives the assurance of indemnity and help to collect the capital
to lunch a new business and expand the existing business.

Provide safety and security:

Insurance provide financial support and reduce uncertainties in business and human life.
It provides safety and security against particular event. There is always a fear of sudden
loss. Insurance provides a cover against any sudden loss. For example, in case of life
insurance financial assistance is provided to the family of the insured on his death. In
case of other insurance security is provided against the loss due to fire, marine, accidents
etc.
Generates financial resources:
Insurance generate funds by collecting premium. These funds are invested in government
securities and stock. These funds are gainfully employed in industrial development of a
country for generating more funds and utilized for the economic development of the
country. Employment opportunities are increased by big investments leading to capital
formation.

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Life insurance encourages savings:
Insurance does not only protect against risks and uncertainties, but also provides an
investment channel too. Life insurance enables systematic savings due to payment of
regular premium. Life insurance provides a mode of investment. It develops a habit of
saving money by paying premium. The insured get the lump sum amount at the maturity
of the contract. Thus life insurance encourages savings.

Promotes economic growth:

Insurance generates significant impact on the economy by mobilizing domestic savings.
Insurance turn accumulated capital into productive investments. Insurance enables to
mitigate loss, financial stability and promotes trade and commerce activities those results
into economic growth and development. Thus, insurance plays a crucial role in
sustainable growth of an economy.

Medical support:
A medical insurance considered essential in managing risk in health. Anyone can be a
victim of critical illness unexpectedly. And rising medical expense is of great concern.
Medical Insurance is one of the insurance policies that cater for different type of health
risks. The insured gets a medical support in case of medical insurance policy.

Spreading of risk:
Insurance facilitates spreading of risk from the insured to the insurer. The basic principle
of insurance is to spread risk among a large number of people. A large number of persons
get insurance policies and pay premium to the insurer. Whenever a loss occurs, it is
compensated out of funds of the insurer.

Source of collecting funds:

Large funds are collected by the way of premium. These funds are utilised in the
industrial development of a country, which accelerates the economic growth.
Employment opportunities are increased by such big investments. Thus, insurance has
become an important source of capital formation.

Though insurance sectors in Bangladesh are improving as well as improving the GDP of
the country, it has to develop its activity more. The environment of Bangladesh has the
opportunity of improved insurance sectors if it's used carefully & efficiently. As a first
step towards achieving the objective, the Insurance Act, 2011 in replacement of the
previous Insurance Act, 1938, and the Insurance Development and Regulatory Authority
Act, 2011 also has been passed for establishing a stronger insurance sector in
Bangladesh. And the proper implementation of the new act is extremely important. As
the Insurance Act 2011 is for the insurance industry, the concerned authority should
consider the interests of the insurance companies of Bangladesh as well as the
stakeholders ‘interests. Strict transparency and discipline need to be there where around
3.0 million people are involved. The stand of the Bangladesh Insurance Association has

13
taken which stressed the need for formation of the Insurance Development and
Regulatory Authority and formulate necessary rules and regulations to make the new
laws effective and purposeful.

Major Factors Contributing to Economic Growth

Considerable increase in per capita income has been made possible by sustained
economic growth. The three broad economic sectors (agriculture, industry and services)
contributed to the process of economic growth. Between 2009-10 and 2016-18, the
growth rate of the agriculture sector declined while it increased in the services and
industry sectors. The overall share of the agriculture (including fisheries) sector to GDP
declined to around 14 per cent, while that of the services and the industry sectors
increased to around 52 per cent and 34 per cent respectively in FY 2016-17. Within the
industry sector, growth in the manufacturing (led predominantly by the ready-made
garments (RMG) sector), 'electricity, gas and water supply' and the construction sub-
sectors experienced positive growth. Within the manufacturing sector increase, large
industries experienced positive growth, while it remained largely unchanged in the case
of small-scale industries. Within the services sector, growth in trade, hotels and
restaurants and transport, storage and communication remained unchanged; and real
estate declined. Financial intermediations registered positive growth, though at a low rate.
Economic growth in Bangladesh has been helped largely by export earnings from the
ready-made garments (RMG) sector; remittances sent by migrant workers; growth in the
agricultural sector; expansion in Medium, Small and Micro Enterprises (MSMEs);
decline in the rate of population growth; and the government's safety net programs.
First, considerable expansion has taken place in the RMG sector since the late 1970s.
Today, it is the most important industry in the country; and Bangladesh is the second
largest apparel exporter of western brands, after China. The RMG sector accounts for
around 82 per cent of total exports. Bangladesh's garment exports increased from US$ 6.8
billion in 2005 to over US$30 billion (The Financial Express, July 05, 2018).
Second, being a labor surplus country, annually about 0.5 million Bangladeshis migrate
abroad in search of jobs. According to the Bureau of Manpower Employment and
Training (BMET), the total number of Bangladeshi labor migrants was around 11.5

14
million in 2017. The figure represents about 4.5 per cent of the country's population and
11 per cent of its labor force (BMET 2018). With increase in the number of migrant
workers, there has been considerable increase in the amount of annual remittance.
Third, agriculture sector witnessed remarkable progress, despite continued loss of arable
land. There has been a sharp increase in food grain production during the last over four
decades. The increase has been made possible as a result of a liberalized input market and
expansion of irrigation, encouraging farmers to adopt the new seed-fertiliser technology.

Bangladesh Economy
Growth set to approach 8% as new government
assumes power

The Bangladesh economy recorded 7.86% growth

in FY18, exceeding the FY18 budgetary target of
7.40%. GDP growth target for FY19 has been set
at 7.80%. Growth in FY18 was the highest GDP
growth recorded by the Bangladesh economy in
recent times, and caps a 5-year run of continuous
increases in the GDP growth rate. Bangladesh had
the highest GDP growth rate in the South Asia
region in FY18, beating India, whose GDP grew
6.7% for the same period. GDP growth is forecast
to approach the 8% level in FY19 and beyond. In USD terms, the size of economy
reached USD 274 billion in FY18. The per-capita GDP now stands at USD 1,675 and the
per-capita income stands at USD 1,751, a 8.76% growth over the previous fiscal year. At
current growth rates, Bangladesh is set to overtake India in per-capita GNI by 2022.

A stable political and macroeconomic environment in FY18 contributed to a broad-based

pick-up in economic activity. No major political or security related disruptions occurred
in FY18, suggesting that the country has gradually moved into a new regime that will be
marked by greater political stability and consequently higher growth rates. The
unemployment rate currently stands at 4.2%, although maintaining low levels of
unemployment has emerged as a major challenge for the government, with more than 2.2
million people joining the workforce annually, according to the World Bank.

15
The relatively peaceful transfer of power is also
expected to increase business optimism,
consequently leading to growth in private sector
investments. Growth is expected to continue full
swing from second half of FY19 after the new
government is formed. We expect GDP growth to
approach the 8% level in FY19 and beyond,
driven by strong domestic demand and gross fixed
investment.
Budget of 2019 – 2020
The proposals put forward in 2019-2020 budget include increasing capital (authorized
and paid up) of banks gradually, amending Bank Company Act so that bank
management, all components of revenue management (VAT, Customs and Income Tax)
can function as usual, without facing any conflict with other laws. Bank Company Act
will be amended so that amalgamation, merger and absorption of banks can be legally
processed, if required.
Tk. 33,202 crore is proposed for public- and equity investments in nationalised
corporations, banks, and financial institutions, which is 6.35 per cent of total allocation.
Tk. 57,070 crore for interest payment, which is 10.91 per cent of total allocation. Tk.
1,245 crore for net lending and other expenses, which is 0.24 per cent of total allocation.
In the proposed budget some issues are traditional and of compromising nature such as
more funds will be injected into state-run banks despite their continued financial
irregularities and irresponsible lending practices. In the coming fiscal year, some Tk
1,500 crore will be set aside to bail out these banks. Regarding value added tax (VAT),
the government is going to implement the new VAT law. Bangladesh would have been
benefited much and be a pioneer in modern VAT system if VAT Law 2012 would be
implanted in due course. From the businessmen’s perspectives some issues are not
encouraging such as different VAT rates at imports, production, wholesale and retail
stages with input credit eligible only for the top 15 per cent rate. This may result reducing
VAT to almost like an excise duty.
 No mentionable instruments were used in our financial sector. This has led banks
to give long term loans by collecting short term deposits. This creates a mismatch.
It may turn out to be critical sometimes. We will take necessary measures to
remove such kind of mismatch.
 According to budget 2019-2020, Bank Company Act will be amended so that our
bank management, all components of revenue management (VAT, Customs and
Income Tax) can function as usual, without facing any conflict with other laws.
 Bank Company Act will be amended so that amalgamation, merger and absorption
of banks can be legally processed, if required.
 Bringing down the interest rates of bank loans to single digits was also proposed
with a view to making our industries and businesses more competitive.

16
  Necessary amendments will be brought to the Bank Company Act to modernize
the functions of holding companies and subsidiary companies.
The overall budget deficit will be Tk 1, 45,380 crore, which is 5 percent of GDP like the
previous year. In financing the deficit, Tk 68,016 crore will come from external sources
and Tk. 77,363 crore from domestic sources.
According to the budget of 2019-2020, some changes and amendments will happen. They
are:
 Loss of crops due to natural calamities is quite frequent in our country. In order to
save the farmers from the financial loss caused by this, a pilot project for ‘crop
insurance’ will be introduced. In addition, insurance of properties generated from
large projects will be covered by the local insurance companies. Measures will be
taken to arrange group insurance with more than one company, if necessary.
Insurance for ‘loss of profit’ will also be introduced. Accident insurance for
factory workers will be implemented.
 The government is planning to introduce livestock insurance, small insurance for
poor women and health insurance for government employees and common people.
Digitization of the insurance sector and its high rate of penetration have been
planned. I believe, the use of life insurance is not prevalent in our country;
popularization of life insurance may contribute to our economy to a great extent.

Impact
The government decided that defaulting borrowers could regularize their accounts on
payment of only 2.0 per cent down payment. Bankers protested against the decision as
they reasoned that such rescheduling will put the entire banking financial sector under
severe liquidity crisis. They pointed out that such low percentage of down payment by
the borrowers as well as payment through small instalments will increase the repayment
period. This would not help the crisis being faced by the financial sector at the moment.
The budget has taken a number of positive initiatives. For example, pension scheme for
all, insurance coverage for government employees, wealth tax, additional tax on the
registration for vehicles, incentives for remittances, and tax office in every upazila.
Recommendations & Conclusion

The banking sector is one of the fast growing industries in Bangladesh. It plays a unique
role in accelerating the economic growth in Bangladesh by creating economic expansion
for most of the economic sectors including agriculture, industry and trade; and by
providing initial capital for investment projects. The present study attempts to find out the

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association between the banking sector financial performance and economic growth. This
study concludes that there is a statistically significant impact of banking sector financial
performance on the economic growth in Bangladesh. Based on the findings of the study,
it is suggested that the concerned authority should take necessary steps for the
development of the banking sector and thereby accelerating the economic growth.
Besides, this study will offer some noteworthy information to the banks, investors,
governments, experts, and regulatory authorities. The banks being the vital organ of the
economy should be imbued with the spirit of patriotism to finance the developmental
activities in the interest of the country as well as their survival. But one has to establish
the viability of those activities undertaking realistic analysis before releasing the funds
for the purpose. The NCBs should not make the same mistakes as16 were committed in
the past for extending directed credit. They should reckon with the three things in
enhancing the quality of lending/investment -- (i) developing adequate professionals, (ii)
uncompromising attitude with the viability of the projects and entrepreneurs and
monitoring system and (iii) avoidance of gross mismatch between the maturities of
deposits and loans. While development financing has to be a part of the loan-portfolio of
all banks regardless of the ownership, politicization of credit in loan disbursement and
recovery should not prevail in any form. There might be occasions when some sector/
economic activity has to be financed at concessional interest rates (as is now the case
with the export sector), but in such cases, the extent of subsidy (the difference between
the shadow lending rates and the administered interest rates) should be borne by the
Government through provision of budgetary allocation. The same policy may also be
followed for any waiver of loan (as warranted by the natural calamities) enforced at the
instance of the Government. It should, however, be noted that as the commercial banks
are free to set up lending rates, they should not favor a higher lending rate (beyond the
repaying capacity of the borrowers) burdened by high risk premium being guided by the
risk aversion attitude. The loan pricing policies followed by the NCBs seem to be driven
by their compulsion to recoup the past losses. With a view to maintaining the quality of
future lending, loan pricing should be immune from any past hangover. In case of private
banks, the cost of borrowings vary from one borrower to another in the same lending
category not depending upon risk perceptions but based on the intimate relationship
prevailing with the closely held borrowers. This undesirable discrimination should be
done away with for upholding healthy and competitive banking system. The financial
health of the banks, particularly, the NCBs have deteriorated in terms of capital
adequacy, loan classification and provisioning requirement over time while PCBs have
registered relatively better performance in all the areas. However, PCBs also have huge
provisioning shortfall. With a view to checking further deterioration of the financial
health of the banks, it is urgent that the banks, particularly the NCBs, should provide
serious attention to the 19 improvement of the quality of lending. In this context, the
successful involvement of commercial banks in development financing largely depends
on the establishment of sound structure of prudential regulation and supervision by the
central bank. This entails overhauling of accounting, auditing, and information disclosure
rules and bringing these items in line with current financial technology. The focus of

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bank supervision should shift from the implementation of Govt. directives such as credit
allocation, to the quality of loan portfolio, adequacy of capital, and the soundness of bank
management. In the competitive banking environment the need for product
diversification can hardly be overemphasized in view of the assumption of the functions
of development financing as the modern view suggests. Planned diversification, both in
relation to sources and uses of funds, would help improve the liquidity position of the
banks and accessing to the funds of compatible maturities for term lending on the one
hand, and find out the various potentially viable uses of funds on the other.

Insurance being the contract of utmost good faith, it is the duty of the insurers to issue
policies in unambiguous terms. Therefore, it is necessary to ensure that the warranties
and conditions are well understood by the insured and are complied with. Since the
conditions & express warranties are printed on the face of the policies (generally in
English); from the legal point of view the insurers perhaps can
not be held responsible for not making the terms of the policies clear to the insured.
However, the Regulatory Authority may advise all the insurance companies to publish
small leaflets/ booklets in “Bangla” containing important terms, warranties & conditions
of the policies. In some countries the
Regulatory Authority itself publishes leaflets & booklets of similar nature in order to
create awareness among the insurance consumers.
In a competitive market economy, insurance companies shall have to survive by
providing more & more efficient services to the clients. “After Sales Policy Servicing” is
an important function of the insurance companies. The insurance companies may be
encouraged to send their employees & executives to avail the opportunities of training
courses in order to develop their skill and ensure efficient client service. There is also a
dire need for establishing dedicated training institute in the private sector to serve the
insurance industry more efficiently and effectively. Need for an efficient and technical
supervision is a sine-quo-non for the smooth development and growth of the industry.
Therefore, it is a necessity to equip the supervisory authority with appropriate technical
manpower and equipment for smooth and efficient supervision. Publication of “Insurance
Year Book” is long overdue. If and when published, this will not only enlighten the
industry with necessary statistics but will also satisfy consumers with authentic
information to know about industry and to enhance confidence of the consumers.
Insurance business is completely driven by knowledge and technology. The business of
selling insurance products requires assessing the profile of the customer and designing
the right policy. The process is facilitated by a data base and data warehousing that is
created in the course of operation. In the era of globalization, domestic market should be
well organized while the legal framework should be effective to address the changed
circumstances in the business and socio-economic entities. In order to meet the
challenges caused by changes, the Insurance Ordinance 2011 should be kept as flexible as
practicable so that any change in the operational procedure, accounting, actuarial standard

19
that would be needed in future inline without change in the international and domestic
environment could be made without further amendment to the Ordinance.
Finally, it is recommended that further research and investigations can be carried out for
extended period of time using additional data and more sophisticated research
methodologies.
Bangladesh has favorable trade prospects despite a weaker global growth while exports
and remittances are likely to increase further. Banking sector reforms will attract higher
private investments which will support this ongoing growth. The possibility of
Bangladesh emerging as a developed country is very bright. It will continue to develop
and Budget FY2019-20 reinforces that hope.

Reference
1. Bangladesh National Budget 2019-2020
2. http://www.bangladeshcustoms.gov.bd/budget/2019-2020/123
3. https://www.thedailystar.net/bangladesh-national-budget-2019-20/taka-523190-
crore-bangladesh-budget-passed-1764583?amp

4.  www.sadharonbimacorporation.com

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