Bangladesh Bank - History

History

After the liberation war, and the eventual independence of Bangladesh, the Government of Bangladesh reorganized the Dhaka branch of the State Bank of Pakistan as the central bank of the country, and named it Bangladesh Bank. This reorganization was done pursuant to Bangladesh Bank Order, 1972, and the Bangladesh Bank came into existence with retrospective effect from 16 December 1971.

The 1971 Mujib regime ran a pro-socialist agenda – in 1972, the government decided to nationalize all banks in order to channel funds to the public sector and to prioritize credit to those sectors that sought to reconstruct the war-torn country – mainly industries and agricultural sectors. However, government control at the wrong sectors prevented these banks from functioning well. This was compounded by the fact that loans were handed out to the public sector without commercial considerations, that banks had poor capital lease, provided poor customer services and didn’t have any market-based monetary instruments. But mostly, because loans were given out without commercial sense, and because they took a long time to call a loan non-performing, and once they did so, recovery under the erstwhile judicial system was so abjectly expensive, their loan recovery was abysmally poor. While the government made a point of intervening everywhere, it didn’t set up a proper regulatory system that would diagnose such problems and correct them. Hence, banking concepts like profitability and liquidity was alien to bank managers, and capital adequacy took backseat.

In 1982, the first reform program was initiated, where the government denationalized two of the six nationalized commercial banks and permitted local private banks to create competition in the banking sector. In 1986, a National Commission on Money, Banking and Credit was appointed to recover the problems of the banking sector and a number of steps were taken for the recovery targets for the nationalized commercial banks and development financial institutions and prohibiting defaulters from getting new loans, yet, the efficiency of the banking sectors could not be improved.

The Financial Sector Adjustment Credit (FSAC) and Financial Sector Reform Programme (FSRP) were formed in 1990, upon contracts with the World Bank with the objective to remove government distortions and lessen the financial repression. The policies made use of the McKinnon-Shaw hypothesis which stated that removing distortions will augment efficiency in the credit market and increase competition. The policies therefore involved banks to provide loans on commercial basis, enhance banks’ efficiency and to limit government control to the monetary policy only. FSRP forced banks to have a minimum capital adequacy, to systematically classify loans and to implement modern accounting systems and computerized systems. It forced the central bank to free up interest rates, revise financial laws, and to increase supervision in the credit market. The government also developed the capital market, which too was performing poorly.

However, FSRP was expired in 1996 and afterward the Government of Bangladesh formed a Bank Reform Committee (BRC) whose recommendations were largely remained unaddressed by the then government.