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Sustaining Rapid Growth: A Deeper Look at Bangladesh’s Financial Sector

LightCastle Analytics Wing

Bangladesh more than tripled its Gross Domestic Product (GDP) over the last decade, standing out as one of the top 10 fastest-growing economies in the world. [1] World Bank reports the country’s real GDP growth to have accelerated over time since independence, reaching a remarkable 6.4% growth on average in the 2010s. [2] Moreover, not only is Bangladesh set to graduate from its Least Developed Country (LDC) status in 2026, but it also aims to reach the upper middle-income status by 2031, corresponding to its consistent growth in per capita income. [3] These exceptional feats came with substantial obstacles and even more significant policy reforms over the years. This article delves deeper into the analysis of a recent publication on Bangladesh by the World Bank titled ‘ Change of Fabric ’ and attempts to explore the financial sector of the country in particular. [4]

Growth Drivers: Policy Reforms, Infrastructural Investments, and Globalization

Before commencing the venture, it is imperative to understand the drivers behind such extraordinary growth.

Firstly, infrastructural investment from the public sector and policy reforms for agriculture and education in the 1980s-90s strengthened the economy’s structure.

Secondly, in the late 1990s, openness to the international markets and FDI contributed to the surge of Bangladeshi Reade-Made Garments (RMG) , which now contributes over 83% of all export earnings . [5]

Thirdly, and most importantly, the banking system in the country was extensively overhauled in the late 1980s from a near insolvent condition by privatizing two public banks (Pubali Bank and Uttara Bank) and licensing private commercial banks. Another significant structural reform included introducing back-to-back letters of credit (LCs) that enhanced RMG exports. This allowed banks to act as an intermediary by handling two simultaneous LCs, which would reassure buyers of the authenticity of sales and guarantee sellers of the payment. [6]

These factors added to increasing political stability in the region, and containment of inflation, fiscal deficits, and debt levels boosted further supported growth over time. Moreover, remittance inflow , as a key macroeconomic factor, has seen an accelerating upward trend since 1981.[7] Positioned as the 7th highest remittance recipient in 2022 [8], Bangladesh has received a considerable boost in terms of improving the balance of payments, stabilizing exchange rates, and relieving foreign exchange reserve constraints over the decades.

Barriers to Sustainability

Given its capital efforts, Bangladesh has been able to reap higher GDP growth compared to its structural peers, namely – Cambodia, Vietnam, and India, in the last decade (2011-2021). [4]

Moreover, Bangladesh has ranked 5th among 121 countries in the Nikkei’s COVID-19 Recovery Index and 1st among South Asian countries, demonstrating considerable resilience in times of global economic perils during the pandemic. [9]

However, there are alarming questions about the sustainability of the country’s rapid growth. Firstly, only a handful of countries have been historically successful in sustaining growth figures over a long period, empirically implying slowing economic growth and the possibility of stagnation. Secondly, the World Bank seems to be suspicious of Bangladesh’s GDP growth figures because the numbers do not seem to match the country’s fundamentals. The lack of policy reforms and structural inefficiency to keep up with the growing economy in recent years is another cause of concern.

Moreover, the increasing GDP has not translated into greater economic inclusion and poverty reduction in the country, meaning possible inefficiencies in the system. Three specific growth constraints have been identified by the World Bank based on extensive economic analysis – export concentration on RMG, loss of benefits from urbanization, and finally, the focus of this article – increasing financial sector vulnerabilities. [4]

For the purpose of drawing a clear picture, the financial sector will be discussed in three broad headers – the banking sector , policy interventions , and private sector credit , highlighting vulnerabilities in each category.

The Banking Sector: Fundamental Constraints

The banking sector comprises 90% of the total financial sector assets in Bangladesh. As of 2021, a total of 61 banking institutions , including 43 domestic private commercial banks, operate in the country with assets equivalent to 67% of GDP . [10]

According to a score of 346.2 on the Herfindahl-Hirschman Index (HHI) , Bangladesh’s banking sector is highly competitive, leading to suboptimal decisions in terms of investments and loans and, in general, ill practices not beneficial to the market. In comparison, our neighboring country India has only 21 private commercial banks.

Bangladeshi banks have the lowest capital to mitigate risks compared to their peers. The capital-to-risk-weighted assets ratio (CAR) measures a bank’s available capital compared to its risk-weighted credit. This measure denotes the stability of a bank and conveys its ability to absorb or mitigate losses in case of risks materialize. [11] The CAR of Bangladeshi banks stood at 11.6% in 2019, implying high-risk exposure and undercapitalization predominantly among state-owned banks. This is substantially lower than all of its peers except Vietnam (whose CAR stands close to 12%). For example, the CAR of India and Indonesia lie roughly around 15% and 23%, respectively, implying relatively better capital support and consequently lower risk.

Bangladeshi banks also have the highest non-performing loans (NPL) among their peers, even though the figures are officially understated due to faulty legal definitions of default. Low capitalization paired with a high NPL load limits the ability of banks to supply credit to the private sector and be efficient in the long run. This is evident in the fact that the biggest banks by market share (mostly state-owned banks) have lower lending growth than deposit growth, suggesting misallocation or subpar use of funds. Such practices, combined with the dire condition of available capital, pose serious risks to the financial stability of the country.

The fundamental flaws are reflected in Standard & Poor’s (S&P) long-term sovereign credit rating of BB- for Bangladesh. This indicates that though Bangladesh might be able to fend off short-term financial needs, the country would face significant trouble dealing with long-term economic and financial adversities. A lower credit rating leads to higher borrowing costs for Bangladesh. Although the country is hinging on increasing per capita income and other external indicators to maintain a stable rating, if the banking sector is somehow exposed, Bangladesh could face devastating outcomes. [12]

Policy Interventions: Interest Rate Caps and Market Inefficiency

The cap of 9% on the lending rate from April 2020 was initially a measure to contain high-interest rates during the COVID-19 turmoil, which could have limited access to credit and led to an economic slowdown. Banks cannot charge any borrower an interest rate above 9% until the regulator says otherwise.

Frequent meddling in interest rate policies does not allow market forces to act and inhibits economic efficiency. For example, as banks cannot charge higher interest rates for lending, they would have to provide lower interest rates for deposits. Real returns from deposits have turned negative in several cases owing to higher inflation. Hence, Bangladesh Bank had to step in once again to set a floor for deposit rates pegged against the Consumer Price Index (CPI) inflation rate. This is one of many interventions that authorities have taken over the years to promote financial stability and keep the inflation rate and currency value in check. [4]

Interest rate ceilings cloud banks’ judgment of risks and profitability, leading to poor lending decisions and compromising their capital positions. Again, deposit rate floors disincentivize banks from lending since they would operate on a tighter margin. Banks are hence unable to assess the best investment decisions based on the highest value to their shareholders and, ultimately, the economy. Government intervention is necessary to maintain stability and competitiveness in the economy, but too much involvement can inhibit market forces leading to economies that become inefficient and suffer in the long run. [4]

Private Sector Credit: Drawbacks to Growing Credit

Increasing credit to the private sector denotes higher economic activity in a country as more people are confident in borrowing owing to amicable policies and monetary support . Bangladesh has been improving its private credit to GDP ratio over time but still lags behind compared to its peers, with one of the lowest figures in the category. In 2020, the private credit to GDP ratio stood at 45.2%, gaining stability around the 45% mark since 2016. This means that although GDP has grown substantially, borrowing from the private sector remains stagnant, implying the underutilization of funds and inherent inefficiency in the economy.

Although comparatives draw a negative image of Bangladesh, the domestic growth of private sector credit indicates a different picture. Private borrowing has increased over the past year, given an interest rate cap of 9% , reaching a staggering BDT 12,870 billion in July 2022. Private sector credit growth reached 14.07% in August 2022 compared to the same month of last year, whereas the government initially set a target of 14.1% for the current fiscal year. [13] From one perspective, this growth would mean an improved business environment in the country with a considerable boost in GDP.

However, higher credit growth is only helpful when the money being borrowed is returned with interest, or in other words, recirculated in the economy. Otherwise, increased credit creates inflationary pressure and can lead to price rises owing to greater money flow in the economy. The inflation rate stood at 7.48% as of July 2022 . [14] Money does not flow back into the banks when loans are not returned in due time (usually 180 days), hence increasing the amount of non-performing loans (NPLs) .

Over the past year, while private credit was increasing, so was the portion of NPLs among the debt, reaching 8.9% in the April-June quarter of 2022. The corresponding increasing trends suggest that more and more people are struggling to repay their debts while banks are lending away more money. An interesting highlight would be the sudden spike in NPLs from the beginning of 2022, especially in the January-March quarter. A plausible cause would be the Russia-Ukraine turmoil which had adverse impacts on commodity prices nationally and internationally. Businesses are likely to have incurred higher costs which created obstacles in terms of loan repayments.

Banks in Bangladesh that already struggle to secure profits in the fierce competition had to comply with policy restrictions and were required to operate on fixed interest rates. The scenario would have prompted commercial banks to make riskier lending decisions to hope for higher returns. Hence, increased private sector borrowing, added to the fact that a higher portion of these debts is being defaulted, means that banks would start to deplete their capital. When banks run low on capital, it is no longer a private concern but rather a national one since banks are the fundamental blocks of an economy. Hence, intervention from Bangladesh Bank and policymakers is imperative when the entire financial system is put at risk.

Recommendations

1. deregulate interest rate caps.

Reality substantially differed from the initial plans by the government of crafting a contractionary monetary policy. First, to curb inflationary pressures and mitigate risky lending from banks, the interest rate caps should be removed or raised.

According to experts from the Centre for Policy Dialogue (CPD) , interest rates should be deregulated and be determined by the markets based on the supply of funds and demand for credit. [15] Although this might mean a higher cost of borrowing for any borrower, the action would tighten the money supply in the economy and ultimately reduce inflationary pressures. The result would also potentially lead to banks making more feasible lending decisions, ultimately lowering the number of defaulted loans.

Although the government has increased the repo rate (the interest rate at which Bangladesh Bank lends money to commercial banks) to 5.50% in June 2022 from 5% in May 2022, there is still much room for restriction. The United States is setting a prime example in controlling inflation and sweeping money supply through consecutive hikes in federal fund rates (similar to the repo rate), which stands at 3-3.25% in September 2022, a 0.75% raise from the previous rate. [16]

2. Mitigate risk indicators

Clear guidelines and legal support should be catered to by the banks to incentivize effective NPL resolution . A keen eye on each bank’s CAR could effectively deal with separate institutions in this regard. Not only would timely recognition and resolution of NPLs prove profitable to banks but also reduce burdens on the entire economy. This action ensures that credit growth not only remains stable but also accelerates, provided that banks would have greater returned capital and would be capable of driving further investments. Private sector credit would hence be effective and have its desired economic advantages.

3. Strengthen corporate governance and accountability

Strengthening corporate governance , especially in state-owned banks, is imperative to address fundamental flaws in the entire banking sector of Bangladesh. Numerous banks are involved in related party lending, meaning that owners’ acquaintances are given higher priority in terms of debt irrespective of the risk they carry. These activities put the banks’ interests in question, in addition to raising their risk exposure. Not only does this create structural inefficiency in the economy but also halts potential growth prospects for the country. Hence, in the long term, addressing banking sector weaknesses from the cores of its operation would be cardinal in pushing the financial sector beyond its current limitations.

Bangladesh is on the track of mammoth economic expansion , and for further development to take place, the country needs to recognize the massive untapped potential in the financial sector . Tackling short-term limitations in policy-making and setting fundamental standards in the banking institutions for long-term sustainability would be key to efficient and effective allocation of financial resources.

This article was authored by Mehedi Hasan Mahir , a Content Writer at LightCastle Partners. Advisory and editorial support was provided by Samiha Anwar , Business Consultant at LightCastle Partners. For further clarifications, contact here: [email protected]

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• Back-to-Back Letters of Credit, Investopedia https://www.investopedia.com/terms/b/back-to-back-letters-of-credit.asp 
• The behavior of Remittance Inflows and its Determinants in Bangladesh, Bangladesh Bank https://www.bb.org.bd/pub/research/workingpaper/wp1202.pdf  
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• Banks and Financial Institutions Overview, Bangladesh Bank https://www.bb.org.bd/en/index.php/financialactivity/bankfi  
• Capital-To-Risk Weighted Assets Ratio, Investopedia https://www.investopedia.com/ask/answers/051415/what-formula-calculating-capital-risk-weight-assets-ratio-bank.asp  
• Bangladesh’s credit rating unchanged, The Daily Star https://www.thedailystar.net/news/bangladesh/news/bangladeshs-credit-rating-unchanged-3103516  
• Private credit growth surges, nears Bangladesh Bank target, The Daily Star https://www.thedailystar.net/business/economy/news/private-credit-growth-surges-nears-bb-target-3129776  
• Bangladesh Inflation Rate, Bangladesh Bank https://tradingeconomics.com/bangladesh/inflation-cpi  
• How effective will the Bangladesh Bank’s new monetary policy be? – Fahmida Khatun, Centre for Policy Dialogue https://cpd.org.bd/how-effective-will-the-new-monetary-policy-be/  
• Fed raises rate by another three-quarters of a percentage point, CNBC https://www.cnbc.com/2022/09/21/fed-rate-hike-september-2022-.html

WRITTEN BY: LightCastle Analytics Wing

At LightCastle, we take a data-driven approach to create opportunities for growth and impact. We consult and collaborate with development partners, the public sector, and private organizations to promote inclusive economic growth that positively changes the lives of people at scale. Being a data-driven and transparent organization, we believe in democratizing knowledge and information among the stakeholders of the economy to drive inclusive growth.

For further clarifications, contact here: [email protected]

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Development of Capital Market and Financing Future Growth in Bangladesh

• First Online: 22 February 2020

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• Monzur Hossain 2  

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This chapter highlights various aspects of the capital market in Bangladesh, which now consists of two stock exchanges—Dhaka and Chittagong stock exchanges. After a crash in 2010, various policy reforms helped the market return to its normal behavior. Lack of institutional investors and underdeveloped secondary bond market are key impediments of the capital market to meet the financing needs of the country in the backdrop of its graduation from the least developed country (LDC) status, which is likely to be achieved in 2024. Therefore, a set of recommendations is made in this chapter for further development of the capital market in Bangladesh.

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Hossain, M. (2020). Development of Capital Market and Financing Future Growth in Bangladesh. In: Hossain, M. (eds) Bangladesh's Macroeconomic Policy. Palgrave Macmillan, Singapore. https://doi.org/10.1007/978-981-15-1244-5_17

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• Published: 10 October 2017

Financial innovation and economic growth in Bangladesh

• Md. Qamruzzaman   ORCID: orcid.org/0000-0002-0854-2600 1 , 2 &
• Wei Jianguo 1  

Financial Innovation volume  3 , Article number:  19 ( 2017 ) Cite this article

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This study provides evidence for the financial innovation in the financial system that resulted in the economic growth of Bangladesh from 1980-2016.

To capture the influence of financial innovation on economic growth, we estimated the long-run cointegration by applying Autoregressive Distributed Lag (ARDL) bound testing and Granger causality-based Error Correction Model (ECM) to capture the directional association.

The Test of Cointegration satisfied the existence of a long-run association between economic growth and the financial innovation proxies, which were the Domestic Credit to the Private Sector (DCB) as a percentage of the Gross Domestic Product and the Broad-to-Narrow Money (M2/M1) as a percentage of the Gross Domestic Product. Our results showed that in the long run, credit circulation to the private sector and monetary management play important roles in economic growth. We also found that the coefficients of the financial innovation proxy variables were positive and statistically significant both in the short run and long run. We also ran Granger causality tests to investigate the directional effect. This study confirmed the feedback causality between the economic growth and 2 proxies of financial innovation in the short and long run. The gross capital formation and trade openness contribute significantly to explaining the economic growth in Bangladesh.

The government of Bangladesh should encourage financial innovation in the financial system, especially at financial institutions, so that access to financial services can easily provide for equitable development. The government should also encourage financial innovation in the capital market, which will assist in raising long-term capital for investment and expedite overall economic growth.

The dynamic economic environment is immensely influenced by rapid innovation, especially financial innovation in the financial system, both in terms of number and value (Błach 2011 ). Financial innovation expands economic activities through promoting financial inclusion, facilitating a financial transaction in international trade, enabling remittance and uplifting financial efficiency, which eventually play a fundamental role in economic growth. Financial innovation, in developing countries like Bangladesh, represents an opportunity for financial sector development (Napier 2014 ; Ndako 2010 ). It is, because, financial innovation reflect as an agent for exploring Financial development through diversification of financial services (Silve and Plekhanov 2014 ; Bianchi et al. 2011 ; Merton 1992 ), efficient financial intermediation (Johnson and Kwak 2012 ), technological advancement (Valverde et al., 2007 ; Michalopoulos et al. 2011 ), and new channel for efficient resource allocation for productive output (Duasa 2014 ; Sood and Ranjan 2015 ), in turn, thus, accelerated sustainable economic growth at large. Financial sector development can cause economic growth, because efficient financial sector mobilized economic resources, assist in capital accumulation (Ahmed 2006 ) and increase efficiency level in the financial system (Saad 2014a , 2014b ; Michael et al. 2015 ), eventually lead towards economic growth.

Over the decade, Bangladesh experience emergence of diversified financial innovation in the financial system, especially in the banking sector such as emergence of mobile banking, specialized financing options to promote entrepreneurship (i.e., SME refinancing scheme by Bangladesh bank, Aporojita loan for women entrepreneur), internet banking, agent banking, to stimulate financial development process through capital maker development with a view to support capital adequacy to investors, establishment of nonbank financial institutions to support institutional credit for investment. The financial sector of Bangladesh comprises with private commercial banks, insurance companies, leasing companies, specialized financial institutions, such as House Building Finance Corporation, financial markets, and informal financial institutions.

The financial sector of Bangladesh, according to Bangladesh Bank ( 2017 ), is dominated banking sector accounting 65% of total financial assets in the financial sector, followed by nonbank financial institutions 15% and capital market by 7% and remaining accounted by informal financial institutions. Financial sector development of Bangladesh not only expediting financial performance but also contributing a noticeable amount in GDP, accounting 12% having substantial growth rate at 7% from 2015 to 2016 (BBS, 2017 ).

Empirical literature about the nexus between financial innovation-growth suggests that there is a strong association between financial innovation and economic growth (see, for example, Bara and Mudxingiri 2016 ; Bourne and Attzs 2010 ; Lumpkin 2010 ; Sekhar 2013 ). Financial Innovation includes new financial instruments, the creation of new corporate structures, the formation of new financial institutions, the development of new accounting and financial reporting techniques (Laeven et al. 2015 ; Štreimikiene 2014 ; Demetriades and Hussein 1996 ), such development in the financial system is the key to bring financial efficiency with economic growth (Saqib 2015 ).

Innovation in the financial sector not only accelerated financial development process but also assist in the capital accumulation, a technological innovation which eventually leads sustainable economic growth both short and long run (Chou and Chin 2011 ; Orji et al. 2015 ; Mishra 2010 ).

This study is novel in different aspects. First, Existing empirical studies suggest a few studies been conducted by researcher focusing on nexus of financial development and economic growth in Bangladesh using limited time period data (see, for example, Rahman 2004 ; Shahbaz et al. 2015 ), Uddin et al., 2014a , b ; Masuduzzaman 2014 ; Uddin and Chakraborty 2014 ; Kabir and Hoque 2007 ; Ali and Hassan 2010 ; Paul 2014a , 2014b ), in this research, we tried to cover long time series data to explore more convincing findings. Second, the Empirical literature shows that no such conclusive research focusing on financial innovation impact on economic growth of Bangladesh conducted yet, such research gap encourages us to take the opportunity to explore how and to what extent financial innovation playing a critical role in the development process of Bangladesh. Finally, we are using newly developed ARDL bound testing for investigating long-run association. The paper is structured as follows: theoretical and empirical literature brought in Section 2, Section 3 presents the data and the methodology for the study in details; Research model specification and estimation with details interpretation included in Section 4, and finally Section 5, explain research findings with policy recommendations for future development. The dynamic economic environment is strongly influenced by rapid innovation, especially financial innovation in the financial system (Błach 2011 ). Financial innovation expands economic activities through promoting financial inclusion, facilitating financial transactions in international trade, enabling remittances, and increasing financial efficiency, which eventually plays fundamental roles in economic growth. Financial innovation in developing countries, such as Bangladesh, represents an opportunity for financial sector development (Napier 2014 ; Ndako 2010 ). This opportunity occurs because financial innovation acts as an agent for exploring financial development through the diversification of financial services (Silve and Plekhanov 2014 ; Bianchi et al. 2011 ; Merton 1992 ), efficient financial intermediation (Johnson and Kwak 2012 ), technological advancement (Valverde et al., 2007 ; Michalopoulos et al. 2011 ), and new channels for efficient resource allocation for productive output (Duasa 2014 ; Sood and Ranjan 2015 ) that accelerates sustainable economic growth. Financial sector development can cause economic growth because an efficient financial sector can mobilize its economic resources, assist in capital accumulation (Ahmed 2006 ), and further increase the efficiency level in the financial system (Saad 2014a , 2014b ; Michael et al. 2015 ).

Over the last decade, Bangladesh has experienced the emergence of diversified financial innovations in the financial system, especially in the banking sector, financial innovation bringing changes by offering versatile service introducing mobile banking, specialized financing options to promote entrepreneurship (i.e., the SME refinancing scheme by the Bangladesh bank and Aporojita loans for women entrepreneurs), internet banking, agent banking (which stimulates the financial development process through capital making developments to support the capital adequacy for investors), and the establishment of non-bank financial institutions to support institutional credit for investment. The financial sector of Bangladesh comprises private commercial banks, insurance companies, leasing companies, specialized financial institutions (such as the House Building Finance Corporation), financial markets, and informal financial institutions.

According to Bangladesh Bank ( 2017 ), the financial sector in Bangladesh is dominated by banking, which accounts for 65% of the total financial assets in the financial sector, followed by non-bank financial institutions (15%) and the capital market (7%); the remaining part is comprised of informal financial institutions. The development of the financial sector in Bangladesh not only expedites financial performance but it also significantly contributes to the GDP (12%); this sector experienced substantial growth (7%) from 2015 to 2016 (BBS, 2017 ).

Empirical studies about the nexus between financial innovation and growth suggest that there is a strong association between them (Bara and Mudxingiri 2016 ; Bourne and Attzs 2010 ; Lumpkin 2010 ; Sekhar 2013 ). Financial innovation includes new financial instruments, the creation of new corporate structures, the formation of new financial institutions, and the development of new accounting and financial reporting techniques (Laeven et al. 2015 ; Štreimikiene 2014 ; Demetriades and Hussein 1996 ). Such developments in the financial system are key to bringing financial efficiency with economic growth (Saqib 2015 ). Innovation in the financial sector not only accelerates the financial development process, but it also assists in capital accumulation, a technological innovation which eventually leads to sustainable economic growth in both the short and long run (Chou and Chin 2011 ; Orji et al. 2015 ; Mishra 2010 ). This study is novel in several aspects. First, existing empirical studies suggest that little research has been conducted on the nexus of financial development and economic growth in Bangladesh using a limited time period (Rahman 2004 ; Shahbaz et al. 2015 ; Uddin et al., 2014a , b ; Masuduzzaman 2014 ; Uddin and Chakraborty 2014 ; Kabir and Hoque 2007 ; Ali and Hassan 2010 ; Paul 2014a , 2014b ). In this research, we examined the data from a long time period to reveal more significant results. Second, a literature search revealed that there is no conclusive research focusing on the impact of financial innovation on the economic growth of Bangladesh. This research gap encouraged us to explore how and to what extent financial innovation plays a critical role in the development process of Bangladesh. Finally, we used the newly developed ARDL bound testing to investigate the long-run association. This paper is structured as follows: the theoretical and empirical literature is discussed in section 2. Section 3 presents the data and methodology for the study in detail. The research model specifications and estimations with a detailed interpretation are included in section 4. In section 5, we explain our research findings with policy recommendations for future development.

Theoretical and empirical literature review

Theoretical literature.

Innovation is an obvious driver of economic growth because it introduces new ideas, instruments, and solutions for the existing problems. Most importantly, it changes business competitiveness and creates more value for enterprises. Innovation can take place in the real sector and financial sector of the economy. It can be categorized as all of the scientific, technological, financial, and commercial activity necessary to create, implement and develop new financial markets with improved financial assets (OECD 2004 ). Innovation not only considers the creation of a new thing but also acts as the panacea for prolonged economic problems (Kotsemir and Abroskin 2013 ). Schumpeter ( 1912 ) indicated that innovation can take place in the form of a new product, process, market, raw material, a method of distribution, or organizational structure.

The traditional economic view of innovation growth states that financial innovation improves the quality of financial products and services (Schrieder and Heidhues 1995 ; McGuire and Conroy 2013 ), expedites the financial development process (Ozcan 2008 ), improves capital accumulation and allocation processes (Uddin et al., 2014a , b ; Allen 2011 ), and increases the level of efficiency in financial institutions (Shaughnessy, 2015 ). The efficiency of financial institutions, moreover, has an impact on financial development through better payment mechanisms that expedite both domestic and international trade (Sabandi and Noviani 2015 ).

Institutional innovation, like other types of innovation, in the financial system, expedites the financial process with improvements, such as internet banking and mobile banking services (Raffaelli and Glynn 2013 ; Hargrave and Ven 2006 ), Microfinance institutions, NGOs, and hybrid organizational forms (Battilana and Dorado 2010 ). These innovations improve the economy by including a greater number of people in the mainstream economic development process (Epstein 1992 ; Siddiqui and Ahmed 2009 ; Glaeser et al. 2004 ).

Empirical literature review

The existing literature suggests that the development of the financial sector has a strong association with economic growth (Asghar and Hussain 2014 ; Bwirea and Musiime 2015 ; Comin and Nanda 2014 ; Duasa 2014 ; Hye and Islam 2013 ; Jedidia et al. 2014 ; Khoutem et al., 2014 ; Kyophilavong et al. 2016 ; Masuduzzaman 2014 ; Mhadhbi 2014 ; Ndlovu 2013 ; Rana and Barua 2015 ; Saad 2014a , 2014b ; Sunde 2013 ; Uddin et al., 2014a , b ). This association exists because an efficient financial system allows for the effective mobilization of economic resources with higher productivity. The idea of financial innovation is not a new one, but over the last decade, its speed has created some challenges that impact financial development, including structural changes in the financial sector, the reshaping of financial services, and the introduction of new financial assets in the financial markets. Financial innovation introduces and popularizes new financial instruments, institutions, and technologies to the financial system (Sood and Ranjan 2015 ). Schumpeter ( 1911 ) emphasized the importance of well-functioning financial intermediaries in innovation and economic growth. The interactions of innovations in the financial sector create economic growth.

Financial innovation is an integral part of economic activity; for example, financial innovation has resulted in structural changes in the financial system through the improvement in financial services and modified payment systems (Boot and Marinc 2010 ; Michalopoulos et al. 2011 ), new products and features for existing financial products (Sekhar 2013 ; Simiyu et al. 2014 ), and new financial institutions and financial markets (Odularu and Okunrinboye 2008 ; Simiyu et al. 2014 ). It has also brought about changes in government regulations and shifted social perceptions (Mwinzi 2014 ; Wachter 2006 ; Chou and Chin 2011 ).

Financial development can take place with various financial innovations, such as the improvement of the capital market and the banking sector. A well-functioning capital market and banking sector contribute to economic development (Ndako 2010 ; Handa and Khan ( 2008 )) through capital formation, the efficient allocation of resources, and by establishing a bridge between surplus units and deficit units. In the opinion of Wadud ( 2009 ), Adusei ( 2013 ), and Cavenaile et al. ( 2011 ), well-developed banks and the capital market both play a significant role in sustainable equitable development by allowing productive investment (Mhadhbi 2014 ; Orji et al. 2015 ; Ilhan, 2008 ; Ansong et al. 2011 ; Bakang 2016 ). These, in turn, accelerate economic growth (Ang 2008 ; Duasa 2014 ), but the impact of financial development is subject to economic conditions (Adusei 2013 ). Uddin et al. ( 2012 ) showed that financial development through the improvements in the banking sector can cause economic development and also assist in poverty reduction. Developing the financial sector allows people access to more institutional credit for investment (Uddin and Chakraborty 2014 ). According to Rana and Barua ( 2015 ), credit from financial institutions is yet to have an immense influence on promoting the overall economic development in South Asian countries. The development of the financial market is considered to be a channel of efficient economic resource mobilization (Kerr and Nanda 2014 ). Financial markets intensify the process of capital accumulation. A well-functioning capital market plays a driving role in sustainable economic development through the adoption of financial innovation in the economy (Levine 1997 ).

An efficient financial system is a prerequisite for a modern economy (Wachter 2006 ), which includes financial markets, institutions, instruments, and regulations (Mannah-Blankson and Belnye 2004 ). It offers value-added financial services and payment mechanisms (Bilyk 2006 ), (Ajide 2015 ; Nagayasu 2012 ). Such financial facilities in the financial system expedite economic growth by creating financial opportunities (Beck et al. 2012 ; Chou 2007 ). Efficient financial intermediation enhances economic activity by providing better financial support in trade and commerce by lowering the investment risk through diversification (Djoumessi 2009 ; Shittu 2012 ; Cheng and Degryse 2014 ). A robust and efficient financial system promotes growth by the reallocation of economic resources in the economy in an effective and efficient manner.

An efficient financial system is the outcome of continuous financial innovation (Blair 2011 ), which allows for the emergence of various financial institutions, especially banks, with improved financial services and more credit facilities, liquid cash, and financial instruments, which leads to economic growth (Levine 1997 ; Jedidia et al. 2014 ).

Variable and sources

Our analysis used the annual time series data for the period 1980–2016. The data were collected and transformed from 3 sources: the World Development Indicators published by the World Bank (World Bank 2017 ), the World Economic Outlook published by the IMF (World Economic Outlook 2017 ), and the Bangladesh Economic Review published by the Ministry of Finance (MOF 2016 ). The research variables are positively defined in Table  1 . The statistical analysis package Eviews 9.5 was used for the data analysis.

We selected the real GDP per capita as the economic growth indicator, which is widely used by researchers (Bara et al. 2016 ; Bara and Mudxingiri 2016 ; Ajide 2015 ; Cavenaile et al. 2011 ; Ndlovu 2013 ; Sabandi and Noviani 2015 ; Mwinzi 2014 ). If any country experienced an increasing trend in its GDP per capita over the selected time period, we assumed that that economy was growing.

Financial innovation in the economy brings about changes through the introduction of new financial instruments, institutions, services, and reporting (Laeven et al. 2015 ). The impact of financial innovation on the economy is diversified and no single variable can be considered as an appropriate indicator for measuring its significance in the economy. We selected 2 Proxy indicators to measure financial innovation. The first proxy for financial innovation is the Domestic Credit to the Private Sector (DCB), which refers to the ratio of the number of credit facilities to the private sector for investment in the form of securities, loan, and other accounts receivable. Growth economic theory predicts that capital adequacy will positively influence economic growth, and so we assigned this variable a positive sign for its coefficient. Using the approach found in Bakang ( 2016 ), the second proxy for financial innovation was defined as the Broad-to-Narrow Money (M2/M1) (Laeven et al. 2015 ; Bara and Mudxingiri 2016 ; Bara et al. 2016 ; Ansong et al. 2011 ).

The other macroeconomic variables we used were the Gross Capital Formation (GCF) and Trade Openness (TO), which were both expected to have a positive coefficient, implying a positive impact on economic growth. The Government Expenditure (GEXP) and Consumer Price Index (CPI) were given negative coefficients, implying their negative effects. Variables were converted into their natural logs for further estimation. Table  2 shows the descriptive statistics and correlations among the variables. Figure  1 exhibits a graphical representation of the natural log form of the research variables.

Natural log of research variables

Augmented Dickey-Fuller (ADF) test

It has to be observed from an empirical study that time series data have a complicated dynamic structure which is not fully captured by simple AR (1) model. Said and Dickey ( 1984 ) augment the basic AR unit root model to ARMA(p,q) with the inclusion of unknown order which is now well known as augmented Dickey-Fuller (ADF) test. Augmented Dickey-fuller test considering H 0: series x t is I (1) against I (0) by assumption of data have dynamic structure.

In order to testify variables stationary and order of integration, we use Augmented Dicky-Fuller test (1981). The test to be conducted by the consideration of n th order difference of the seven variables. The test ADF use autoregressive (AR) process.

Where, D t is a vector of deterministic term (constant, trend etc.), n for lagged difference term, ∆ x t  −  i term for ARMA structure of the error and ε t is for white nose (error term).

Phillips-Perron unit root tests

Finding the unit root using the Phillips –Perron (PP) test rather than the ADF has become popular because the PP test is capable of dealing with serial correlations and Heteroskedasticity in the error. For example, where the ADF tests use a parametric autoregression to approximate the ARMA structure of the errors in the test regression, the PP test ignore any serial correlation in the test regression. The test regression for the PP test is:

Where ε t is I (0) and may be Heteroskedastic. The PP test rectify any serial correlation and Heteroskedasticity in error term.

The extended Aghion, Howitt, and Mayer – Foulkes (AHM) model

Our study used an extended Aghion, Howitt, and Mayer-Foulkes (AHM) model developed by Laeven et al. ( 2015 ) and subsequently used by Bara and Mudxingiri ( 2016 ). Both of these studies tested models to find the impact of financial innovation on endogenous growth; they used the assumption that “the economy without financial innovation will stagnate, irrespective of the initial level of financial development”. The AHM model was developed based on the Schumpeterian growth model, where entrepreneurs earn a profit by introducing better products and services.

To test the model, Laeven et al. ( 2015 ), Bara and Mudxingiri ( 2016 ), and Bara et al. ( 2016 ) extended the AHM model to incorporate financial innovation with financial development. All of the researchers emphasized financial innovation. In their models, they assumed that the financial development that occurs in any period is the impact of previous financial innovations. Bara et al. ( 2016 ) derived the following model from the AHM framework:

The dynamic regression model to be estimated in this study as follows:

Where Y is the growth of GDP per Capital, X are control variables, F is financial development and fi are financial innovation. The linear form of eq. ( 5 ) is followed;

Where ln is for natural logarithm, GDPPC is the Growth Rate of GDP per Capital, GEXP is Government Expenditure, CPI is Consumer Price Index, TO is Trade Openness, GCF is Gross Capital Formation, DCB is Domestic Credit to Private Sector and M2/M1 is the ration Broad-to-Narrow Money. For capturing speed of adjustment towards equilibrium from any shock in variables, we formulated the following error correction model (ECM) to estimate:

All the variables are positively defined earlier, except ∆ represent change and ECT t  − 1 is the error term lagged in one period and ε represents white noise. The coefficient of first difference of the variables show short run causality and coefficient of ECT t  − 1 shows long run causality.

The autoregressive distributed lag (ARDL) model

Several cointegration methods are available for use, including the residual basis Engle and Granger ( 1987 ) test and the maximum-likelihood-based Johansen ( 1991 ; 1995) and Johansen-Juselius ( 1990 ) tests. Since there are limitations to these models, researchers have turned to the Ordinary-Least-Square- (OLS) based Autoregressive Distribution Lag (ARDL) approach. Its advantage over other cointegration methods is its flexibility for using a set of variables that are integrated in a different order (Pesaran et al. 2001a , 2001b ). Moreover, a dynamic Error Correction Model (ECM) can be derived from the ARDL through using the linear transformation (Banerjee et al., 1993).

This study used the ARDL model due to its advantages over other cointegration models. First, the Autoregressive Distribution Lag Model is superior because it can be used regardless of sample size (which can be small or infinite) and consists of 30 to 80 observations (Ghatak and Siddiki 2001 ). Second, this approach is more suitable when variables are integrated in a different order, such as when some variables are I (0) and some variables are I (1). Third, modeling the ARDL with the appropriate lags corrects for both the serial correlation and indigeneity problem (Pesaran et al. 2001a , 2001b ). Fourth, the ARDL model can be used to simultaneously estimate the long-run and short-run cointegration relations and provide an unbiased estimation (Pesaran et al. 2001a , 2001b ). A simplified ARDL model (see, Paul 2014a , 2014b ) for the variables X, Y, and Z can be expressed as:

Where γ 1 ,  γ 2 ,  γ 3 are long run coefficients whose sum is equivalent to the error correct term at VECM model and θ 1 , θ 2 θ 3 represents short run coefficients. The generalized ARDL model for assessing financial innovation impact on economic growth of Bangladesh is as follows;

Where ∆ indicates differencing of variables, while ε t is the error term (white noise), and (t-1) is for lagged period, λ 0   to λ 6  is long run coefficient. To capture long run cointegration among variables, we formulate following ARDL models considering each variable as dependent variable to estimate best fitted model for further analysis (shown in matrix form).

The bound test for examining the long run association among variables can be conducted using F tests. The approximate Critical values for F test can be obtained from Narayan 2004 ; Pesaran et al. 2001a , 2001b . The null hypothesis of no cointegration among variables in equation (8) is  θ 11 , …. θ 77  = 0; and alternative hypothesis is θ 11 , …. . θ 77  ≠ 0.

The F-statistics have non-normal distributions for the following reasons (Narayan 2004 ): the ARDL model variables’ order of integration was either me (0) or me (1), the number of regressions used in the estimation varied, and the ARDL model contained trends or/and intercepts. The decision concerning the cointegration existence is based on the critical values and F-statistics. If the F-statistics are greater than the critical value of the upper bound I (1), then we can make a conclusive inference about the existence of the cointegration among the variables.

Once, the long-run association established, next 2 steps need to be executed to estimate long run and short run coefficients of the proposed ARDL models. The long-run ARDL (m, n, q, t, v, x, p) equilibrium model is as follows:

The legs length of ARDL model to be estimated using Akaike Information Criterion (AIC). Using time series data for the study, Pesaran et al. ( 2001a , 2001b ) proposed maximum lag length is 1. The short-run elasticities can be derived by formulating error correction model as follows:

Where error correction term can be express as:

We expected the coefficient of ECT to be negative and statistically significant to explain the speed of the adjustment towards the equilibrium. To ascertain the goodness of the fit of the ARDL model, the diagnostic and stability tests were also conducted through serial correlations, functional forms, normality, and Heteroskedasticity associated with the model. The stability tests of the regression coefficients were also performed.

Results and Discussion

Stationary test.

Table  3 shows the stationary test outcomes of the research variables with the ADF and PP methods. The table shows that the variables were not integrated in the same order. The variable ln (CPI) is stationary at level I (0), whereas ln (M1/M2), ln (DCB), ln (TO), ln (GDPPC), ln (GEXP), and ln (GCF) become stationary after the first difference I (1). However, no variables are integrated at I (2); it is the necessary condition of the nature of such variables that suggest applying the ARDL for further analysis.

Table  4 shows the optimal length is 1 out of the maximum of 4 lags, which was selected after considering 5 different criteria. A further analysis found that the optimal lag length is 1.

ARDL bounds tests for cointegration

Long-run cointegration was investigated through ARDL bound testing with a null hypothesis and no cointegration; the test results are exhibited in Table 2 . Model 1 and 2 refer to financial innovation using 2 proxy variables (M2/M1 and DCB). Model 3 refers to the financial development using the gross capital formation as a proxy. During the bound testing of these 3 models, we ran each model by considering each variable as the dependent variable to investigate the long-run cointegration. Fifteen models were tested. Table 5 shows that only 3 models (1a, 2a, and 3a) show a high F-value compared to the critical value at a 1% level of significance given by Pesaran et al. ( 2001a , 2001b ) and Narayan ( 2004 ). It indicates that there is conclusive evidence in favor of a long-run association between financial innovation, financial development, and economic growth. These findings are in line with those in the literature (Ajide 2015 ; Boot and Marinc 2010 ; Chou and Chin 2011 ; Duasa 2014 ; Merton 1992 ; Mosongo et al. 2013 ) (Table  5 ).

Long-run and short-run coefficients estimation

Once the long-run cointegration was confirmed by the bound testing when economic growth was the dependent variable (Table  6 ), we proceeded to estimate the long elasticities by using the ADRL model’s long equation. The estimated long-run coefficients ( p -value) of the 3 models are shown in Table 6 .

Narrow-to-broad money (M2/M1) as a proxy for financial innovation

The financial innovation proxy M2/M1 had a positive coefficient and statistically significant. It implies that over the long run, the financial innovation related to the increasing money supply has a positive impact on the economic growth of Bangladesh. This outcome is in line with the findings from the literature (Bara and Mudxingiri 2016 ; Ogunmuyiwa and Ekone 2010 ). It is apparent (Table 6 ) that a 1% increase in the money supply will increase economic growth by 0.65%. The growth economic theory suggests that increasing the money supply in the economy expedites the aggregated production level with a reduction in the cost of production. The availability of the money supply increases the credit option in the economy with a lower cost of capital. The relationship between the M2/M1 and GDPPC ensures that financial innovation in the financial system of Bangladesh will have a positive impact on its long-run sustainable economic growth. The government, therefore, should formulate innovation-friendly financial policies to encourage financial innovation.

Domestic credit from private sector (DCB) as a proxy for financial innovation

Model – 2 is developed by considering another proxy variable of financial innovation is Domestic Credit to Private Sector (DCB). We found (Table 6 ) that DCB had a positive impact on economic growth and the coefficient is statistically significant. The empirical studies of Ndlovu ( 2013 ), Tyavambiza and Nyangara ( 2015 ), and Michalopoulos et al. ( 2011 ) support these findings; however, Bara and Mudxingiri ( 2016 ) found a positive association between them that was insignificant. The Economic Development theory explains that an efficient and well-functioning financial sector accelerates the capital accumulation process, which leads to economic development (Kyophilavong et al. 2016 ). The development of the banking sector in Bangladesh has played a significant role in economic development through financial improvements. In order to accelerate financial development, financial innovation should be encouraged to obtain the maximum benefit from it. In the long run, both indicators of financial innovation show their positive association with significance. In order to boost the economic growth of Bangladesh, policymakers should assist in the process of financial innovation. Financial innovation promotes financial development, which leads to long-term sustainable economic growth (Habibullah and Yoke-Kee 2007 ).

The Error Correction Term (ETC) represents the speed of adjustment towards the equilibrium over the long run. According to Pahlavani et al. ( 2005 ), a stable model and long-run association can be identified by considering the coefficient for the ECT and associated p-value. Table 5 shows the ARDL short-run dynamics with the ECT coefficient. It is apparent that all 3 of the models satisfy the criteria proposed by Pahlavani et al. ( 2005 ) about the ECT(−1) (i.e., it has a negative sign and is statistically significant). The coefficients of the ECT (−1) for the 3 models are −0.49, −0.57, and −0.55, respectively. These values indicate that about 49% for Model - 1, 57% for Model - 2, and 55% for Model - 3 of the disequilibrium of the previous year’s shock can be adjusted in the current year.

The financial innovation indicators (Table  7 ) in all of the models have a positive impact over the long run, but the coefficients are not statistically significant. In Model - 1, the M2/M1 shows a positive impact on the short-run economic growth that is statistically significant. The positive impact of the M2/M1 is supported by the economic theory that states the additional money supply will increase aggregated production in the short run, but the actual effects will only be observed in the long run. In other words, the money supply in the economy can be translated into economic growth for Bangladesh, but its impact is significant over the long run, although the short-run impact is positive, but not significant. It is also apparent that another indicator of financial innovation (DCB) has a positive impact and is statistically significant. It indicates that the development of the banking sector plays a positive role in the economic development process.

The VECM granger causality analysis

We used VECM analysis in order to investigate causality; the results are shown in Table 6 . This table shows the coefficients of the short-run and long-run tests. The lagged ECT (−1) represents the long-run causality in the model; for the long-run causality, the existence error term should be negative and statistically significant. It is obvious (Table  8 ) that the lagged ECT (−1) coefficient is negative and statistically significant for those models where the dependent variables are lnGDPPC, lnM2/M1, and lnDCB. This result implies that a feedback causality exists in long-run economic growth and financial innovation [lnGDPPC < == > lnM2/M1], which is supported by Bara and Mudxingiri ( 2016 ) and Mannah-Blankson and Belnye ( 2004 ), study also explored that feedback hypothesis is also prevail between [lnGDPPC < == > lnDCB], which is in line with results in the literature (Rana and Barua 2015 ). On the other hand, we also observed that financial development and economic growth support the feedback hypothesis over the long run [lnGDPPC < == > lnGCF], which is in line with results in the literature (Singh 2008 ).

In short-run, we also found that feedback hypothesis exist between [M2/M1 < == > GDPPC] and [DCB < == > GDPPC], which captures the short-run causality of the 3 models, it is implying that in short-run additional money supply in the economy and credit flow to private sector development can cause economic growth and simultaneously any adjustment in GPD also influence on Money supply and credit flow in the economy.. This analysis revealed a similar short-run causality between financial development and economic growth, as well.

Model stability analysis

In addition, having structural economic changes in Bangladesh, it might be macroeconomic series subject to one or more structural breaks. Thus, we go for estimating model stability to ensuring acceptability of both long run and short run coefficient of the study. For stability test of econometric models, significant number of researchers rely on cumulative sum and cumulative sum squares (see, for example, Nyasha and Odhiambo 2016 ; Omoniyi and Olawale 2015 ; Shrestha and Chowdhury 2005 , Alimi 2014 ; Pesaran et al. 2001a , 2001b ; Narayan and Smyth 2005 ) which is proposed by Borensztein et al. 1998 ).

Figures  2a , 3 and 4b report cumulative sum of recursive residual (CUSUM) and the cumulative sum of the square of recursive residuals (CUSUMQ) of all three proposed model of the study, it is revealed that test line falls within the 5% significant level critical boundary. This implies the stability of estimated parameters of a proposed model of the period of 1980 to 2016, indicating there are no systematic changes identified. These findings also consistent with existing literature (see, for example, Motsatsi 2016 ; Owusu 2016 ; Ozturk 2008 ; Pan and Mishra 2016 ; Ozturk and Acaravci 2010 ; Narayan 2005 ).

a CUCUM statistics plot at 5% for Model 1. b CUSUM of Squares test statistics plot at 5% for Model 1

a CUCUM statistics plot at 5% for Model 2. b CUSUM of Squares test statistics plot at 5% for Model 1

a CUCUM statistics plot at 5% for Model 3. b : CUSUM of Squares test statistics plot at 5% for Model 1

Conclusion and recommendations

Financial innovation is not a new phenomenon in the financial system, over the past decade, modern economy experience financial reforms, structural changes with innovative financial institutions, and financial assets as a means of financial development (Michalopoulos et al. 2011 ). Financial innovation constitutes the introduction and promotion of the financial system by offering better and improved financial products, services, and new processes that establish interactions with customers and assist in the creation of a new financial structure for financial development, which eventually expedites a sustainable economic development program (Nagayasu 2012 ; Saqib 2015 ). This study was carried out to capture the impact of financial innovation on economic growth in Bangladesh for the period from 1980 to 2016 by applying ARDL bound testing and causality based on the ECM to capture the directional association. This study used 2 proxy variables for financial innovation (the Broad-to-Narrow Money as a percentage of the GDP (M2/M1) and Domestic Credit to Bank as a percentage of the GDP (DCB)) and the gross capital formation as a proxy for financial development as a percentage of the GDP.

ARDL bound testing was used to confirm the long-run cointegration between financial innovation and economic growth, and our results showed higher F-statistics for both proxy variables in comparison to the critical values proposed by Pesaran et al. ( 2001a , 2001b ) and Narayan ( 2004 ). However, our results were in line with those of Mwinzi ( 2014 ), and the financial development indicator also exhibited long-run cointegration with economic growth as well. The model coefficients of each indicator of financial innovation explained their positive contribution both in the long and short run towards economic growth. The associated probability was less than 5%, implying that it was statistically significant as well. We presumed that any initiative towards encouraging financial innovation in the financial system might have a positive influence on economic progress with efficient financial institutions, financial intermediation, and efficient allocation of economic resources; these, in turn, expedite economic growth. We also ran the Granger causality test under the ECM to capture the directional association between financial innovation and economic growth. Our study revealed the feedback causality between financial innovation and economic growth both in the long run and short run, implying that any shock either in the economic development process or financial development through encouraging financial innovation can produce positive development in the economy. Our results showed that financial innovation in the financial system can accelerate the economic growth of Bangladesh through positive improvements in financial development and the mobilization of economic resources. This is because our study found a positive and significant relationship among the M2/M1, DCB, and GGDPPC over the period from 1980 to 2016. Financial innovation, therefore, can be a source of economic growth for Bangladesh.

We recommend policymakers encourage a positive relationship between financial innovation and economic growth. First, the government should encourage a competitive financial environment with greater interactions by including both formal and informal financial institutions in the financial system. Second, the appropriate initiatives should be undertaken to merge and adopt new financial assets, services, and payment mechanisms for efficient financial development with financial innovation. Financial innovation in the economy not only causes economic growth but also promotes the financial development of the country, as well. An efficient financial system is a driver for economic growth (Ram 2007 ). In order to support financial innovation, the government and private sector should participate in supporting and formulating financial policy in such a way that financial innovation can be developed at its own pace.

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First, of all, we would like to thank five anonymous reviews from your journal in the revision stage of submission. We also grateful to Professor Zaho from the school of economics, Wuhan University of Technology for his thoughtful suggestions and meaningful guidelines along with my fellow classmates of their opinions regarding the overall article.

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Financial Sector in Bangladesh: Recent Trends and Benchmarking for the Government

Financial Sector in Bangladesh Recent Trends and Benchmarking for the Government

Financial sector of Bangladesh is a bank-based system that has been facing a number of challenges alongside operational expansions. In spite of some notable development, performances of certain section of banks have not been praiseworthy in terms of efficiency and soundness parameters. In view of the situation, the financial sector needs directions and appropriate measures to offer due support to attain sustainable growth targets of the country. This secondary data-based study has attempted to analyse the underlying issues related to operations and performances of the banking and financial industry to put forward some necessary regulatory and policy initiatives. For consolidation of the industry, the study recommended for: addressing willful default; revitalising internal control and compliance; ensuring uniform regulatory environment; working for product diversification and exit strategy; addressing financial crime and money laundering; promoting cluster development and financing; endorsing technology-driven and inclusive banking; supporting development of capital, bond and insurance market; and above all, improving corporate governance and leadership.

Contributors : Shah Md. Ahsan Habib

Publication Period : September 2019

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Addressing two issues will help Bangladesh manage the economy in the new financial year

Without these, inflation is likely to continue and the slowing performance of the economy continues

The Bangladesh economy is under the pressure of continuing 10% inflation, a financial system which is failing to perform well, weak export growth, an unstable foreign exchange position, and weakening economic growth. 

These five very difficult problems must all be solved if economic growth is to be restarted. There are no easy solutions. All the actors are there: IMF, India, WB, Japan, and China working with the Ministry of Finance and the Bangladesh Bank.

The existing program is rather confusing and although there are many actions, so far nothing has produced any results -- although most ideas are just being implemented. 

There are two issues considered herein: (1) Immediate actions to reduce the pressure on the economy of the high rate of inflation. (2) Actions that will enhance the probability of rapid long term growth. 

We note here that in the 8th Five Year Plan it is stated that the most important improvement of the Plan is to raise the quality of the economic data. This important position needs emphasis as the quality of economic data is poor. 

In this article we will focus on these key problems. In the short run the most important problem is to contain inflation. There is widespread agreement that the current inflation is the most serious economic problem facing society. 

Essentially the inflation rate jumped from 5-6% to 10%. What drove this? 

First, there was an increase in dollar prices of imports following increases in prices in Europe and North America. This caused import prices to rise sharply while export prices remained sluggish. The subsequent deterioration of the balance of payments caused the taka to depreciate, increasing the inflation rate further.

The ambitious government expenditure program with limited increase in revenues defines current fiscal policy. A slowing economy and higher interest rates have some moderating effects on inflation. However the government reacted by not paying its bills but the enterprises continued work paying workers, assuming that the government would pay these bills. 

How much the government deficit was reduced is uncertain but it was not enough. To reduce the inflation required a sharper reduction in government expenditures. We shall see if the new budget presents a reduction. 

One is not optimistic. I expect an outcome when the FY25 is over 5-10% in real terms. The strategy of the government is to borrow more money from abroad to finance the government deficit. But this may not reduce the inflation rate.

While interest rates are rising, the impact on investment is uncertain. The relationship between interest rates and private investment in Bangladesh is complicated and the simple relationship of higher interest rates reducing investment is not a correct view of the motivation for investment. 

The concern that one should have is the attempt to blame the inflation on cartels. This is the common view of the public but it is wrong

Expectations of returns for investment are 25-30% and changes of interest rates of 2-5% are irrelevant. Furthermore, borrowers have an expectation that should they face difficulties in repayment, managing delay is alway possible.

Reducing demand for goods and services is more effective by reducing the government deficit. Such reduction must be 2-3% of GDP; implying a substantial decline in government expenditures. That would cause the inflation rate to fall immediately. 

The concern that one should have is the attempt to blame the inflation on cartels. This is the common view of the public but it is wrong. Bangladesh markets are competitive and not monopolistic. 

Another common mistaken belief is that the government can control prices. No government can do so and all that have tried have failed. Monetary policy is unlikely to have much impact. 

This is not the time to try to complicate programs to increase or redirect budget expenditure. What is needed is a ruthless cutting of expenditures for the next two years. The inflation rate will decline and the economy can then be expanded. 

The second action needed for both the curtailment of inflation and restoration of growth is the support for exports. Prospects for exports of leather and footwear have been mishandled. Corrective actions are not too difficult but must be managed to be successful instead of the decade of failure. 

Prospects for shrimp are also excellent and have been lost due to poor policies. Earnings have fallen by half; proper policies could have helped earnings reach $3 billion. Corruption and weak governance have set back this sector. 

The RMG sector remains vital for the future. However, training, R&D, and widening product development have all been unsatisfactory. A serious program in these areas is needed.

Without such programs, Bangladesh will lose its share in the world market and the economy will weaken. For the most important sector in the economy, data is very poor. There is no agreement on the level of employment; there are no price indexes for exports and imports; there is no good data on production costs. 

The growth of exports from the RMG sector has slowed. The causes of this decline are not clear, but it is important to understand. Taxation of the RMG sector is confusing but the sector is not pulling its weight in financing the government. Labour conflicts with the EU and the US may cause difficulties. There are a host of problems and corrective actions needed.

Short term actions to increase exports over the next five years are vital to enable return to rapid economic growth. The Ministry of Commerce must increase its plans and analysis of the export sector to accelerate policies and projects needed.

In the face of the setbacks to the economy the response of the economic team has not been positive. The increase of exports rather than the reduction of imports by administrative actions was the more appropriate strategy. It is still the appropriate course of action.

There is a great deal of analysis done by Bangladesh economists pointing out the anti-export biases in government policy and what is needed to shift trade policy. Part of the work of the Ministry of Commerce is to own the actions to remove the anti-export bias and fight to implement these.

The recovery of the economy from its present problems thus rests on reducing the inflation through lowering of the government deficit over the next two years and a serious set of actions to increase exports. 

Without these steps, inflation is likely to continue and the slowing performance of the economy continues. One must focus on these two issues; other problems can be tackled later.

Forrest Cookson is an economist who has served as the first president of AmCham and has been a consultant for the Bangladesh Bureau of Statistics.

No alternative to decisive action to correct the economy

Why bangladesh struggles to reap the benefits of demographic dividend, ensuring subsidies reach those who need it most, our untapped service export sector, strategies for stability, resisting the allure of price controls, fierce fighting rocks gaza after us warning of anarchy, insurgency, why do relatives of ministers, mps pursue public posts, state dept: donald lu to focus on strengthening us-bangladesh ties, can artificial glaciers help with water shortages, pedestrian predicament: footpath shops spill onto main roads.

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• Concern Worldwide

Background: Concern Worldwide is an international humanitarian organisation dedicated to the reduction of suffering and working towards the ultimate elimination of extreme poverty in the world’s poorest countries. In Bangladesh, Concern Worldwide Bangladesh’s Country Strategic Plan 2022- 2026 aims to contribute to bringing sustainable, positive changes in the lives of people living in extreme poverty in Bangladesh. Concern’s work focusing on improving the food security and health and nutrition status of those living in extreme poverty, including developing a greater understanding of broader health, nutrition and food systems and the linkages between urban and rural areas. Concern’s programmes will directly contribute to progress against Sustainable Development Goals (SDGs), along with the Government of Bangladesh’s 8th Five Year Plan and other relevant policies and strategies.

In the Country Strategic Plan, it is clearly stated that effective engagement of media to support advocacy to draw policy attention to improve access to quality services by the extreme poor.

At present, Concern programme focuses on Health, Nutrition, Climate Change, Disaster Risk Reduction, Equality, Governance, also strengthening advocacy for extreme poor. According to Country Strategic plan (CSP), Concern’s advocacy aims to address policy issues and institutional barriers for the extreme poor. Going forward, we have to build a voice and position as an advocate for influencing policy makers, policy forums and institutions to support the extreme poor move out of poverty where media engagement can play a crucial part.

Objectives: To engage media strategically and systematically to contribute to achieving the Concern Bangladesh CSP objectives 2022-2026

Media Engagement Strategy: Popular Print and TV media will be engaged for Concern’s thematic programmes and to influence policy makers and reach to wider audiences. The TV programmes and Print media article will also capture the policy commitments from the policy makers to contribute to the wider evidence based advocacy of the organization.

All Print & TV Media are available in both print and online media version and TV and print media have good reach in social media channels which will maximize the reach of Concern’s programme and advocacy voices.

Overall Objectives of the media engagement :

• Strategic media engagement for Concern to contribute CSP.
• Engage media strategically and systematically throughout a year or two years.
• Media advocacy to engage and influence policy makers , donors and government authorities
• Strengthen Concern’s profile nationally through media

Expected Deliverables:

• Op-ed – Total 2 op-ed will be published in lead print media, Concern’s staff will write op-ed and the media organization will confirm publishing on time in lead print media. The Op-ed will be on health and nutrition/ COP29/ climate change considering Concern’s programme evidence. Concern will ensure the expert writer for op-ed. The media organization engage expert to write op-ed on behalf Concern.
• Article : Total 8 Articles in lead print media both eng and bangla. The organization will follow policy brief and thematic documents aligned Concern’s advocacy.
• News coverage- Total 10 national event will be covered in national lead media. At least 7 lead print (both eng and Bangla lead print media) and 4 TV channel. In addition the news to be covered in popular online News Media.
• TV Program - 2 TV program for Concern . The media org will engage policy makers / Government high authority along expert and Concern. The media organization will work with Concern to design full program with advice by Concern engaging policy maker/other experts in the discussion. In addition, the media org will ensure Concern’s Expert as speaker in more TV program.TV program will be designed on thematic advocacy including health, climate finance, anticipatory action, urban resilience, Rohingya issue, disaster preparedness.
• Media visit-Total 2 visit in Concern’s programme locations. 2/3 Media journalists must join the visit.
• Barguna/ Patukhali
• Dhaka City Corporation

Media Journalists will visit field to document the best practices, human interest stories and will write in the print media as Article/ article stories. Concern will confirm which stories to capture. The media organization will organize visit and ensure publish in media. The consultant media organization will be flexible to review the plan and deliverables according to the requirements of Concern Worldwide

Duration and Location of Assignment : The total period for this media engagement will be for one (01) year from June 2024- May 2025.

Remuneration/Fee: Interested parties are requested to submit their financial proposal along with the technical proposal including cost of field travel and other relevant cost for the assignment for a period of total12 Months consultancy*;* inclusive all VAT and Taxes as per policy of the government of Bangladesh, which shall be deducted at source prior to the payment.

Payment: Payment will be an agreed amount including VAT and tax for the total assigned service. Full payment will be made upon completion of the assignment as per the agreed ToR. The payment mode will be in three (3) instalments for the entire assignment against invoices issued by the Consultant:

• First instalment is 20% after contract signing with Concern Worldwide.
• Second instalment of 40% of the payment will be made after 6 months of services
• The remaining 40% will be paid upon satisfactory whereby all deliverables are clearly documented.

Concern will not be liable for any bank charges arising from incorrect bank details being provided to Concern. The payments will be made through Account payee cheque.

Line of Communications for media engagement : The Concern Programmes Director and Deputy Programme Director will guide and management support the overall media engagement. However, the day to day management and communications will be supported by the below:

• Concern Communication Coordinator will be managing media engagement for the organization, will provide technical guidance to the media organization throughout the assignment and will ensure all media content closely working with country director, PD, DPD and PMs.
• Advocacy Advisor will ensure policy brief and advocacy message to support media engagement activities.
• Programme Managers will provide support with project information, field coordination, and other programmatic support needed for media engagement for project.

Copyright and Confidentiality: Concern Worldwide will have the copyright for all the documents, media content by the consultant(s) with due acknowledgement. No media document/content should be reproduced or published any manner without prior written approval of Concern Worldwide. The consultant will maintain the confidentiality of the stated assignment.

Concern Worldwide’s Policies and Guidelines: Concern's Code of Conduct (CCoC) and its associated safeguarding policies; the Programme Participant Protection Policy, the Child Safeguarding Policy and the Anti-Trafficking in Persons Policy have been developed to ensure the maximum protection of programme participants from exploitation and to clarify the responsibilities of Concern staff, consultants, contractors, visitors to the programme and partner organisations, and the standards of behaviour expected of them. In this context staff have a responsibility to the organisation to strive for and maintain the highest standards in the day-to-day conduct in their workplace in accordance with Concern's core values and mission. Concern's Code of Conduct and its associated safeguarding policies have been appended to this Contract for your signature. By signing the Concern Code of Conduct you demonstrate that you have understood their content and agree to conduct yourself in accordance with the provisions of these two documents.

Breach of Code of Conduct and Sharing of Information : We are required to share details of certain breaches of Concern’s Code of Conduct, specifically those related to fraud, sexual exploitation, abuse and harassment and trafficking in persons, with external organizations such as institutional donors, regulatory bodies and future employers. In the event where you have been found to be in breach of these aspects of Concern’s Code of Conduct, your personal details (e.g. name, date of birth, address and nationality) and details of these breaches will be shared with these external bodies. Organizations may retain this data and use it to inform future decisions about you.

In addition, where we are working in partnership with another organization and where there are allegations of breaches in the above areas against you, we will cooperate with any investigation being undertaken and will share your personal details with investigation teams.

A breach of this policy will result in disciplinary action up to, and including, dismissal.

Technical Guideline : Both Concern Worldwide’ s Code of Conduct, Communications Branding Policy must be followed throughout this assignment. The communications policy includes the requirement for informed consent of any persons being pictured, videoed, interviewed, etc.

The Consultant/Organization must follow Concern guidelines on communications and branding in all media engagement activities, articles, news, programme etc.

All media activities related to Concern’s work and media content publish to external must be aligned with Concern’s Communications policy.

Safety and Security: It is a requirement that the Consultant will comply with Bangladesh security policy and in-country security procedures. It is a requirement that the Consultant will comply with Bangladesh security policy and in-country security procedures. Failing to comply will result in immediate termination of contract. The work plan will need to be flexible and have built in contingency plans that can be activated through mutual discussion with Concern and the partners on the ground. This will be especially important for activities that require fieldwork and face-to-face interactions.

Experiences and Qualifications

• Over 10 years’ experience as media organization/ senior media professional/ media agency worked in national/international media.
• Experience in facilitating and managing media stakeholders at the national and local level.
• Experience in the designing and managing media programme in TV and Print Media.
• Experience in ensuring high quality accurate media coverage of issues like health, nutrition poverty, climate change, gender equality, urban governance, Rohingya refugee.
• Proven experience of working with Policy Makers and high level decision makers.
• Proven experience working with UN agencies/ INGOs for media engagement.
• Experience in strategic media engagement for development sectors.
• Knowledge and expert on media print and electronic media programmes.
• Excellent technical writing and communications skills for media.

How to apply

Pre-bid meeting for interested consultants on 06 May 2024 at 3:00 pm via MS Teams.

Join MS Teams Meeting

https://teams.microsoft.com/l/meetup-join/19%3ameeting_OWFiYWU0MGItMTZlNi00NDgzLThmOTctZTgxYzI3NDYyNDZl%40thread.v2/0?context=%7b%22Tid%22%3a%22c4c288c0-4de9-4052-8177-e6e1906ae171%22%2c%22Oid%22%3a%22b04968ea-3982-4800-b95e-05ee3329453b%22%7d

How to apply? Interested parties with relevant experience may submit proposals containing following documents by e-mail to [email protected].

Media Organization for consultancy:

• Technical proposal and financial proposal outlining how they will meet the requirements outlined in this Terms of Reference. This should be no more than 10 pages.
• Include a short profile of the media organization highlighting experiences on related strategic media assignment with details of client.
• Lead Consultant’s (team leader) CV (max 2 pages) highlighting related work experiences and assignment completed.
• Other Team members’ (Engage in this assignment) CV (max 1 page each) highlighting related task and assignment completed.
• Consultancy Organization legal documents (Certificate, TIN and VAT registration).
• Evidence of similar strategic media work recently completed.
• List of references for recent work of a similar nature. Concern will be verifying these references.

Technical Proposal Evaluation Format: Total 60 Marks

Evaluation Criteria Marks

Profile of The Media Organization with relevant experiences - 10 marks

Lead Consultant CV with experience in related assignment -15 marks

Number of Evidences of Strategic Media engagement - 15 marks

Experience with UN/INGOs in strategic media engagement - 10 marks

Number/times of Experience engaging policy makers and high level experts in Media programme - 10 marks

Total marks Technical : 60

Total marks Financial : 40

Note: The consultant above 50 marks in Technical Evaluation will be considered for Financial Evaluation. Evidences and experiences along the lead consultant profile will be great consideration in Technical Evaluation.

How to Submit Proposals:

Interested consultancy firms/consultants can email the Expression of Interest i.e. Technical Proposal, Concern’s Financial Template with TIN certificate, trade licence (if any) to [email protected].

Please only write “Strategic Media Engagement” in the subject line of your e-mail.

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