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financial Sector Reforms - FINANCIAL SECTOR REFORMS TASK...

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FINANCIAL SECTOR REFORMS TASK FORCE REPORT Dr. Wahid Uddin Mahmud (Chairman) Professor, Economics Department Dhaka University Mr. Khondoker Ibrahim Khaled (Co-Chairman) Managing Director Pubali Bank Limited Mr. Mohammed Hossain (Member) Managing Director Al-Arafah Islami Bank Limited Mr. C. M. Koyes Sami (Member) Managing Director South East Bank Limited Mr. Shah Md. Nurul Alam Managing Director Prime Bank Limited Dr. Toufic Ahmad Choudhury (Member Secretary) Professor & Director BIBM, Dhaka.
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TASK FORCE REPORT ON FINANCIAL SECTOR REFORMS 1. The major function of a financial system is to strengthen the savings-investment process of the country. For the matter of economic development, the financial system mobilizes and pools together the financial resources from various surplus units, and ultimately channelize all those resources for productive investments. In addition, the financial system influences the economic development process through supporting an active payment mechanism. An efficient payment mechanism helps to achieve specialization and economies of scale in production and strengthens the development process of a country. Because of this widespread relationship between economic development and financial sector, it is said that a sound, disciplined and efficient financial system is a sine qua non for achieving economic growth. (Banking Reform Committee Report, 1999, page-1). 2. The financial system of Bangladesh is mainly bank dependent. Though in the recent years, a number of non-banking financial institutions (leasing and merchant banks) have been established, yet the banking sector still captures the lion share of the financial market. How far the banking system of Bangladesh is efficient, how far, the widespread reform measures undertaken during the last two decades, to increase the efficiency of the banking sector, were effective, and what measures need to be undertaken by the next democratically elected government in the near future for raising the efficiency are the subject matters of this report. However, first of all let us consider the evolution of banking in Bangladesh. 3. Just after the liberation of Bangladesh, the whole banking system (excepting a few foreign bank branches) was restructured and nationalized. During 1972-1982, the banking system used to operate under a regime of rigid government control and central bank regulations. During the period, the banking system expanded very rapidly, specially for providing banking and credit services in the rural areas. On the other hand, the banks were motivated and directed to channelize credit to national priority sectors such as nationalized industries, small entrepreneurs, farmers etc. It is a fact that because of the rapid expansion of bank branches and services, the financial soundness as well as quality of services to a great extent were adversely affected. Consequently, the government denationalized two nationalized commercial banks (NCBs) whilst a number of private commercial banks (PCBs) were allowed to operate in the banking sector. It was expected
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