Topic: The management of commercial banks of Bangladesh

(both corporate & top management), the liquidity crisis, and the
impact of investment.
Course: Strategic Management
Section: 03
Semester: Spring - 2021
Submitted by:
Name ID
Md. Nahid Hasan Ashik 1810331

Submitted to:
Prof. Dr. Mohd. Aminul Karim
Professor, School of Business and Entrepreneurship
Independent University, Bangladesh
Former Lieutenant General of Bangladesh Army

Submission date:
10/03/2021
 Table of contents

Introduction……………………………………………………………………...…3
Liquidity crisis……………………………………………………………………...3
Liquidity crisis behind the reasons……………………………………………….3-4
Recent condition of some bank of Bangladesh…………………………………….4
Impact of investment……………………………………………………………….5
Remedies…………………………………………………………………………5-6
Conclusion………………………………………………………………………….6
References………………………………………………………………………….7
Introduction:
Liquidity crisis is now a big problem in our country. There are lot of projects are ongoing in our
country. The projects money is taken from the bank now the amount of liquid money has
decreased. So, the bank couldn’t give loan to the businesspeople. Which impacts on the
investment. Most of the govt. banks are facing this problem. They gave away huge amount of
money in return they couldn’t get the desired amount of money. There are lot of companies are
not paying their taxes to the government in here the government’s income is decreasing. When
the government bank has lack of liquidity, they are taking money from the private banks. For this
reason, liquidity crisis increased day by day.

Liquidity crisis:
A liquidity crisis is a financial situation characterized by the lack of cash or easily convertible to
cash assets on hand across many financial institutions. In liquidity crisis liquidity problems at
individual institutions lead to an acute increase in demand and decrease in supply of liquidity and
the resulting lack of available liquidity can lead to widespread defaults and even bankruptcies. In
a very simple we can say that when the banks have the little amount of money in their vault is
known as liquidity crisis.

Liquidity crisis behind the reasons:

Fractional reserve requirements contain key features that determine the possibility of both
contagion and systemic banking crisis. Multiple credit and monetary expansion can be produced
through small changes in base money via the system of fractional reserve requirements. This is
because fractional reserve requirements create an inverted pyramid—i.e., a small reserve base
supports a large quantity of deposits and credit.
Many countries that have initiated stabilization plans have experienced early-stage euphoria.
This situation emerges because stabilization generates confidence, and the latter attracts capital
inflows. Those inflows increase the monetary base and, through fractional reserve requirements,
those changes in the base multiply deposits and credit. Conversely, when this phase of increasing
capital flows is reversed, the inverted pyramid plays havoc on the system because, in turn, a
small reduction in the monetary base reduces credit and money supply by a multiple. In fact, the
banking industry is the only business that can “multiply” its output through a relatively small
change in its input. More credit can also be produced simply because the public may choose to
change its preferences regarding its cash/deposit mix. Contrary to other industries, banking is
one of the few where there are often generalized, systemic crises both within and across
countries.5 Fractional reserve requirements can actually do more than just multiply. They can
also blend. In any ordinary business, the nature of liabilities is no different from assets. In the
case of a fractional reserve banking business, however, the (macroeconomic) nature of assets is
different from that of liabilities: assets are credit whereas liabilities are money. Due to the system
of fractional reserves, banks create money (credit) by means of credit (money) and, vice versa,
eliminating credit (money) eliminates money (credit). In this system, money and credit are thus
inextricable interwoven. Moreover, in an inflationary context (without payment of interest on
demand deposits), fractional reserve requirements expand the deposit taking activities of the
banking sector beyond the social optimum.
 Government debts
 Imports of food
 Increased import of machineries
 Imports of fuel and fertilizers.
 Government borrowing from the banking sector.
In these causes the banking sectors are facing liquidity crisis. For the liquidity crisis there is a
huge impact of investment. Now I just want to elaborate the impacts that causes in investment.

Recent condition of some bank of Bangladesh:

According to BB data from January 1 to January 23, state-owned Agrani Bank Limited borrowed
from the call money market on an average over Tk. 300 crore every working day. It was the
highest borrowing rate. Another state-owned bank, Sonali Bank Limited, is on second position as
it borrowed about Tk. 250 crore daily. Within this period, the aggregated amounts of borrowing
by these two banks are Tk. 5,054 crore (Agrani) and Tk. 4,217 crore (Sonali). However, two
other state-owned banks — Janata Bank Ltd and Rupali Bank Ltd — have lent to the call money
market on a regular basis. Within this period, Janata Bank lent Tk. 15,334 crore while Rupali
Bank lent Tk. 1,698 crore.
Among private banks, big lenders were:
1. Basic Bank Ltd (lending amount Tk. 11,894 crore)
2. United Commercial Bank Ltd (Tk. 8,769 crore)
3. Pubali Bank Ltd (Tk. 6,825 crore)
4. Dutch Bangla Bank Ltd (Tk. 5,434 crore)
The Trust Bank Ltd, Bank Al-Falah, Premier Bank Ltd, One Bank Ltd and Bangladesh
Development Bank are also the big borrower. Borrowing and lending are almost parallel for The
City Bank Ltd (aggregated lending Tk. 2,391 crore and borrowing Tk. 2,955 crore) and Standard
Bank Ltd (borrowing Tk. 1,060.50 crore and lending Tk. 1,133 crore). Two foreign banks that
went for regular borrowing from the call money market are Bank Asia Limited and National
Bank of Pakistan. Among foreign banks, Commercial Bank of Ceylon, Citibank NA, Habib
Bank Limited, Honkong Shanghai Banking Corporation, Standard Chartered Bank, State Bank of
India and Woori Bank have lent to the call money market. Meanwhile, FIs, such as, International
Leasing, Lanka Bangla, Peoples Leasing, Prime Finance, Union Capital, Reliance Finance Ltd,
ICB Islamic Bank Ltd and BIFC, are facing acute liquidity crisis.
Impact of investment:
Due to the liquidity crisis the people cannot invest on any business. Because they couldn’t get
the loan from the bank. The bank is having liquidity crisis they have not much money to give the
loan to the investor. Now the question may come who are the stakeholders?

The investors are the stakeholders. They always want to invest money in the new business. Now
the moving towards technology. The people will invest more in this sector. Not only this sector
but also every sectors. As we all know that the people of our country are not rich. Most of the
people are poor and middle class.
To do any kind of business-like SME they need liquidity money. But the problem is we don’t
have that. There are lot of companies in our country they are taking loan from the bank, but they
don’t pay the money to the bank. If we see the condition of the bank above, we can clearly
identify that most of the banks are in a loss position.
In rural area, most of the people are dependent on agricultural sector. To do agriculture the
farmers need fertilizer. Where these fertilizers come? It comes from the businessmen. If the
businessman does not invest due to the liquidity crisis, they couldn’t get the loan from the bank.
The banks are empty by giving a huge amount of to the corporation or large company. But these
problems should be solved.

Remedies:
Reform Bank Financing System:

 Banks by their nature are not well suited for long term lending. According to a report
published by the World Bank in 2019, 69 per cent of lending has a maturity period of less
than 3 years in metropolitan areas. The average term for bank loans in non-metropolitan
areas was 17 months. After independence, state-owned Bangladesh Shilpa Bank and
Bangladesh Shilpa Rin Sangstha were entrusted with the responsibility of providing
industrial term loan to meet the long-term financing needs of the economy. But the
attempt was not very successful as a significant percentage of credit given through those
institutions became non-performing.

 A major problem in the banking sector is the accumulation of huge amount of

nonperforming loan (NPL). The NPL ratio stood at 13.2% as at end-December 2020(BB
Annual Report, 2019-20) which is still very high by any standards, although a downward
trend of NPLs is observed in the banking sector for the last couple of years. SCBs and
DFIs suffer most from NPL problems as about 30% of loans disbursed by these
 categories of banks are non-performing. PCBs are doing better in this regard as 5% of
their loan is non-performing. In developed countries, the tolerable range of NPL is up to
3%. The performance of the banking sector in the neighboring countries in this regard is
also much better than the Bangladesh banking sector. NPL ratios in India, Sri Lanka and
Pakistan are 1.9%, 5.6% and 7.7%, respectively. (1) The NPL problem has several
damaging effects in the way of optimum utilization of resources. On the supply side, it is
limiting the recycling of fund and forcing some banks to follow a very conservative
policy which ultimately makes it difficult for a new firm to get required financial
assistance.

 Ideally, interest rate should reflect the risk of the borrower i.e. the more risky borrower
should pay a higher interest rate and vice versa. But such a variation is not observed in
the interest rate among the borrowers classified in the same sector. Banks’ risk analysis
of borrowers is mainly reflected in the decision of accepting or rejecting the loan
proposal; not so in differentiating interest rate of the credit. The country also lacks an
updated, adequate and reliable data base of the business enterprises. However, we might
expect the increasing availability of company risk profile with the institutional
development of the few number of credit rating agencies that are operating in the country.

 Reform primary stock market.

 Reform secondary stock market.

Conclusion:
The corporate sector heavily relies on indirect financing by procuring bank loans with relative
ease and low cost. So liquidity is very important for the development of a developing country
like Bangladesh. Direct financing through equity issuance remains limited in scope. Overlapping
of regulations, hassles and undue delays in approvals, high cost of issuance, lack of liquidity,
high price volatility, etc. inhibit further growth of equity market in Bangladesh. Political
instability, high country-specific risk, lack of liquidity and transparency, less sophistication,
market shallowness, complex and time-consuming profit repatriation, etc., contribute to an
inability to entice foreign equity portfolio investment. Additionally, domestic investors gain sour
experience from erratic price behavior, rumors, insider trading and regulatory opaqueness.

To overcome liquidity crisis, Bangladesh should pay close attention as well to develop a viable
corporate bond market. Currently, Bangladesh is focused on developing a government debt
market. This market can be catalyst for developing a corporate bond market through market-
based interest rate, innovation of different debt instruments, appropriate regulations for payment
and settlement, insurance, and education.

References:
1. https://www.thedailystar.net/business/liquidity-crisis-reasons-and-ways-overcome-
1557349
2. https://thefinancialexpress.com.bd/views/reviews/liquidity-crisis-a-wake-up-call-for-the-
banking-sector-1560785211
3. https://www.fbs-du.com/news_event/14664864632.pdf
4. https://www.observerbd.com/details.php?id=125757