CHAPTER – 8

BANKING & FINANCIAL SECTOR OF

BANGLADESH
PART – I: GENERAL DISCUSSION & DATA & INFORMATION
 Section - I: History of the Banking & Financial Sector of Bangladesh

1.1 Introduction

The banking and financial sector in Bangladesh has evolved over decades, influenced by historical,
economic, and political changes. From its roots in the British colonial era through the Pakistani
period and into its current structure, the banking sector in Bangladesh has expanded significantly
to accommodate the country’s growing economic needs. Today, the sector includes a mix of
government-owned banks, non-government conventional banks, Islamic banks, specialized banks,
foreign banks, and non-bank financial institutions (NBFIs), each serving different sectors and
contributing uniquely to the economy.

1.2 Types of Banks in Bangladesh

The Bangladeshi banking system is classified into several categories based on ownership,
operational model, and purpose. As per Bangladesh Bank (the central bank of Bangladesh), these
categories are as follows:

1. Government-Owned Banks

Government-owned banks play a major role in supporting Bangladesh’s economy by financing

development projects, agricultural activities, and other public sector needs. The six main
government-owned banks in Bangladesh are:

- Sonali Bank Limited

- Janata Bank Limited
- Agrani Bank Limited
- Rupali Bank Limited
- Bangladesh Development Bank Limited (BDBL)
- Basic Bank Limited

Each of these banks has historical significance, having been formed by merging or restructuring
pre-independence banks.

Old Names of Government-Owned Banks:

- Sonali Bank: Originally formed from National Bank of Pakistan (East), Bank of Bahawalpur,
and Premier Bank.
- Janata Bank: Previously known as United Bank.
- Agrani Bank: Formed from Habib Bank (East) and Commerce Bank.
- Rupali Bank: Originated from Australasia Bank and several smaller banks.
 - Pubali Bank: Previously Eastern Mercantile Bank.
- Uttara Bank: Known earlier as Eastern Banking Corporation.

2. Non-Government Conventional Banks

Private commercial banks are critical for Bangladesh’s financial landscape, facilitating private
sector growth and foreign investment. As of 2024, there are 33 private conventional banks in
Bangladesh, including:Dhaka Bank Limited, Mercantile Bank Limited, Dutch-Bangla Bank
Limited, among others.

These banks operate on a traditional interest-based model, providing a wide range of banking
services, including loans, deposits, and investment products.

3. Islamic Banks

Islamic banking in Bangladesh has expanded rapidly in recent years, aligning with the demand for
Shariah-compliant financial products. Currently, Bangladesh has 10 Islamic banks, such as: Islami
Bank Bangladesh Limited, Al-Arafah Islami Bank Limited, EXIM Bank Limited etc.
Islamic banks follow principles of Islamic finance, such as profit-sharing and avoidance of interest,
providing an alternative to conventional banking for clients who prefer Shariah-compliant options.

4. Specialized Banks

Specialized banks focus on specific sectors like agriculture, industrial development, and rural
finance. These include: Bangladesh Krishi Bank (Agricultural Bank), Rajshahi Krishi Unnayan
Bank (Rural Development Bank for Rajshahi Division) and Bangladesh Samabaya Bank
(Cooperative Bank)

These banks address the financial needs of niche markets, particularly the agricultural sector and
rural areas, by providing customized credit facilities and financial services.

5. Foreign Banks

Several international banks operate in Bangladesh, facilitating foreign investment, international

trade, and currency exchange. Key foreign banks in Bangladesh include: HSBC (Hongkong and
Shanghai Banking Corporation), Standard Chartered Bank, Citibank N.A., among others.

Foreign banks offer sophisticated financial services that cater to multinational corporations,
expatriates, and high-net-worth clients.

6. Non-Scheduled Banks

Non-scheduled banks in Bangladesh are financial institutions that operate with specific purposes
and do not fully comply with the central bank’s regulations for scheduled banks. Examples include:
Ansar-VDP Unnayan Bank, Karmasangsthan Bank etc

These banks focus on social objectives, such as employment generation and development for
specific communities, rather than traditional profit-oriented banking.

7. Non-Bank Financial Institutions (NBFIs)

NBFIs provide various financial services, including leasing, housing finance, and investment
banking, but are not permitted to offer the full range of banking services. As of 2024, there are 34
NBFIs in Bangladesh, including: IDLC Finance Limited, LankaBangla Finance Limited etc.

NBFIs play a vital role in sectors that conventional banks may not fully serve, such as real estate
financing, equipment leasing, and micro-credit facilities.
1.3 History of the Banking Sector of Bangladesh
1.3.1 Reserve Bank of India (RBI) & Its Functions in East Bengal
Before the partition of India in 1947, the Reserve Bank of India (RBI) served as the central bank
for the entire region, including East Bengal (now Bangladesh). RBI’s responsibilities included
currency issuance, banking regulation, and maintaining economic stability. During this time, banks
like the National Bank of Pakistan (East), United Bank, and others operated in East Bengal, playing
a crucial role in regional trade and commerce.

1.3.2 State Bank of Pakistan (SBP) & Its Functions in East Bengal
Following the creation of Pakistan in 1947, East Bengal (then East Pakistan) came under the jurisdiction
of the State Bank of Pakistan (SBP). The SBP was responsible for managing monetary policy, issuing
currency, and regulating financial institutions in both East and West Pakistan. During this period, various
banks emerged in East Pakistan, including the United Bank and Habib Bank, which laid the groundwork
for the banking sector that would later evolve post-independence.
1.3.3 Bangladesh Bank & History of Major State-Owned Banks

After Bangladesh gained independence in 1971, the newly formed government took over the assets of
Pakistani banks and established “Bangladesh Bank” in 1972 as the central bank to regulate the
country’s monetary and banking policies. Bangladesh Bank assumed control over the monetary policy,
issuance of currency, and supervision of all banking institutions in Bangladesh. To strengthen the
banking sector, several large commercial banks were restructured:

- Sonali Bank Limited: Formed by merging National Bank of Pakistan (East), Bank of
Bahawalpur, and Premier Bank.
- Janata Bank Limited: Formerly known as United Bank.
- Agrani Bank Limited: Created from Habib Bank (East) and Commerce Bank.
- Rupali Bank Limited: Originated from Australasia Bank and smaller banks.

Other banks, such as Pubali Bank and Uttara Bank, emerged from former Eastern Mercantile Bank
and Eastern Banking Corporation, respectively. Over time, these banks were reorganized to
support the country’s economic development needs, including financing industrialization, trade,
and infrastructure projects.

The banking and financial sector in Bangladesh has undergone significant transformations since
the country’s independence. With Bangladesh Bank as the central regulator, various types of banks
and financial institutions have developed to serve a growing economy. This diverse ecosystem—
from government-owned banks to NBFIs—plays a crucial role in supporting economic growth,
alleviating poverty, and providing essential services to a wide range of clients. As Bangladesh
continues to grow economically, the banking sector’s stability and adaptability remain central to
the country's financial health and development.

Section - II: Functions of the Banks of Bangladesh

2.1 Functions of Bangladesh Bank (The Central Bank of Bangladesh)

As the central bank of Bangladesh, Bangladesh Bank performs a wide range of crucial functions
aimed at maintaining monetary stability, regulating the financial sector, and supporting the overall
economic development of the country. Below are its main and additional functions:

2.1.1 Main Functions of Bangladesh Bank

1. Monetary Policy: Bangladesh Bank formulates and implements monetary policy to control
inflation, stabilize the currency, and foster economic growth. The central bank adjusts the money
supply and interest rates to influence the economy, often in response to macroeconomic indicators.

2. Currency Management: Bangladesh Bank is responsible for issuing currency notes and coins.
It ensures an adequate supply of currency to meet the needs of the economy while preventing
counterfeit money circulation.

3. Bank Supervision and Monitoring: The bank supervises all other banks and financial
institutions in Bangladesh to ensure they operate within the legal and regulatory frameworks. This
includes regular inspections, reporting requirements, and enforcing standards of financial health.

4. Policy Formulation: Bangladesh Bank plays a vital role in formulating policies that support
the financial sector, economic growth, and financial inclusion. These policies cover a broad range
of issues, such as credit, microfinance, and lending standards.

5. Foreign Exchange Control: Bangladesh Bank manages the country’s foreign exchange by
regulating the currency exchange rates, controlling foreign exchange reserves, and ensuring
compliance with international financial transactions.

6. Reserve Management: The central bank holds and manages the nation’s foreign reserves to
safeguard the economy from external shocks. Reserve management also ensures that there are
sufficient funds to meet international obligations.

7. Lender of the Last Resort: Bangladesh Bank acts as a lender of last resort, providing
emergency funding to banks facing liquidity shortages. This helps prevent bank failures and
promotes stability in the financial system.
8. Bank of Bankers and the Bank of the Government: Bangladesh Bank acts as the banker to
the government and other banks. It holds government funds, manages public debt, and facilitates
transactions between banks, helping to ensure a smooth functioning financial system.

2.1.2 Additional Functions of Bangladesh Bank

In addition to its primary roles, Bangladesh Bank also performs other functions:

- Promoting Financial Inclusion: Initiatives to increase access to banking services, especially for
rural and underserved communities.

- Credit Regulation: Monitoring and controlling lending practices to ensure responsible credit
allocation.

- Digitalization Initiatives: Developing and implementing digital financial solutions, such as

mobile banking, to promote efficient financial services.

- Environmental and Social Responsibility: Implementing “green banking” policies and

financing eco-friendly projects.

2.2 Functions of Government Commercial Banks of Bangladesh

Government-owned commercial banks in Bangladesh serve several critical roles. They are key
providers of credit for various economic sectors, particularly agriculture, small businesses, and
industries. These banks are also involved in managing public funds, government accounts, and
payroll services. Their functions often include:

- Deposits and Loans: Accepting deposits and providing loans for individuals, businesses, and
government projects.

- Supporting Financial Inclusion: Providing affordable banking services to underserved areas

and communities.

- Project Financing: Government banks often finance public sector infrastructure projects,
contributing to national development goals.

Special Role of Sonali Bank: Sonali Bank, being one of the largest state-owned banks, plays a
unique role in assisting Bangladesh Bank by managing government transactions, issuing
government bonds, and facilitating foreign remittances. Its extensive network also enables it to
reach rural areas, contributing to financial inclusion across Bangladesh.
2.3 Functions of Specialized Banks

Specialized banks in Bangladesh focus on particular sectors and developmental objectives. Key
functions include:

- Agricultural Loans: Bangladesh Krishi Bank, for instance, provides credit to farmers,
supporting agricultural development.

- Rural Development: Rajshahi Krishi Unnayan Bank serves rural areas in specific regions,
providing financial resources for rural businesses.

- Support for Cooperatives: The Bangladesh Samabaya Bank supports cooperative societies by
providing financial resources to bolster rural and social enterprises.

Specialized banks are instrumental in poverty reduction and rural economic growth, as they target
sectors that may not be adequately served by commercial banks.

2.4 Functions of Conventional Private Commercial Banks

Private commercial banks in Bangladesh operate on a profit-making model, providing

comprehensive banking services to individual and corporate customers. Their main functions
include:

- Retail and Corporate Banking: Offering various banking products like savings accounts, fixed
deposits, personal loans, and corporate finance solutions.

- Investment Services: Facilitating investment in mutual funds, bonds, and other financial
products.

- Trade Finance: Supporting international trade through letters of credit, trade finance loans, and
foreign exchange services.

- Wealth Management: Providing personalized financial services to high-net-worth individuals.

These banks play a major role in fostering economic activity by providing credit, investment
options, and international transaction facilities.
2.5 Functions of Islami Banks

Islamic banks in Bangladesh operate based on Shariah principles, which prohibit interest (riba)
and focus on profit-sharing and risk-sharing models. Their functions include:

- Shariah-Compliant Financing: Providing services such as Murabaha (cost-plus financing),

Mudarabah (profit-sharing), and Ijara (leasing).

- Profit and Loss Sharing (PLS): Islamic banks encourage profit-sharing arrangements in place
of traditional loan interest, making their services attractive to clients seeking ethical finance
options.

- Investment in Halal Sectors: Islamic banks finance sectors that comply with Islamic law, such
as real estate, agriculture, and manufacturing, while avoiding industries like gambling and alcohol.

These banks serve a large segment of the population seeking Shariah-compliant financial products
and have significantly contributed to Bangladesh's financial inclusion efforts.

2.6 Functions of Private Foreign Banks

Foreign banks operating in Bangladesh provide advanced financial services that support both local
and multinational clients. Their functions include:

- Corporate and Investment Banking: Providing high-level corporate financing, investment

banking, and advisory services.

- Trade and Foreign Exchange Services: Facilitating international trade, foreign exchange
transactions, and currency swaps.

- Technology and Innovation: Introducing digital banking solutions and innovative financial
products, often in partnership with local entities.

Foreign banks contribute to Bangladesh’s global financial connectivity by providing services that
cater to international clients and supporting foreign investment in the country.
2.7 Functions of Non-Bank Financial Institutions (NBFIs)

NBFIs in Bangladesh offer financial services outside the traditional banking framework. Key
functions of NBFIs include:

- Leasing and Asset Financing: Providing leasing solutions for machinery, vehicles, and other
assets, catering mainly to small and medium enterprises.

- Housing Finance: Offering mortgage services and housing loans to individuals and businesses.

- Investment Services: Many NBFIs focus on investments and capital markets, enabling
companies and individuals to invest in stocks, bonds, and mutual funds.

- Microcredit: Some NBFIs provide microfinance services, targeting low-income individuals and
small entrepreneurs.

NBFIs play a complementary role to the banking sector, particularly in areas such as leasing,
housing finance, and microcredit, addressing financing gaps in the traditional banking model.

The banking and financial sector of Bangladesh comprises diverse institutions, each performing
unique functions to support economic development, financial inclusion, and international
connectivity. From Bangladesh Bank’s monetary and regulatory functions to the specialized
services offered by commercial, foreign, and Islamic banks, the sector is dynamic and responsive
to the country’s economic needs. As the sector continues to evolve, each institution contributes
to a stable, inclusive, and growth-oriented financial landscape in Bangladesh.
 Section – III: Current Monetary Policy of Bangladesh

3.1 Overview

The monetary policy of Bangladesh for the first half of fiscal year 2024-25 (H1FY25) is designed
to address both domestic inflationary pressures and external economic challenges. Bangladesh
Bank (BB) continues to focus on stabilizing inflation, enhancing foreign exchange reserves, and
promoting financial stability. BB's primary goals include managing inflation, stabilizing the
exchange rate, and sustaining economic growth in an environment marked by global uncertainty
and domestic economic constraints. This policy framework incorporates both conventional
monetary tools and innovative approaches tailored to address the specific economic landscape of
Bangladesh.

3.2 Objectives of the Current Monetary Policy

The key objectives of the monetary policy for H1FY25 are:

1. Inflation Control: Reducing inflation, which has remained high due to supply-side issues and
global price pressures, is a top priority. BB aims to reduce inflation toward a target of 6.5% by the
end of FY25.

2. Stabilization of the Exchange Rate: The introduction of a managed exchange rate system is
aimed at stabilizing the Taka and managing foreign exchange pressures.

3. Strengthening Foreign Exchange Reserves: Enhancing reserves by encouraging remittance

flows and export receipts while moderating imports is a critical focus.

4. Support for Growth-Sustaining Sectors: Supporting key sectors like agriculture, Cottage,
Micro, Small, and Medium Enterprises (CMSMEs), and the export-oriented industries to foster
growth and employment.
3.3 Main Policy Measures

3.3.1 Monetary Policy Stance

BB has maintained a cautiously tight monetary stance for H1FY25, with the policy repo rate set at
8.5%. The policy also retains the Standing Deposit Facility (SDF) rate at 7.0% and the Standing
Lending Facility (SLF) rate at 10.0%. This tight stance aims to curb inflation by controlling
liquidity in the banking system and limiting money supply expansion.

3.3.2 Open Market Operations (OMOs)

To regulate liquidity, BB has streamlined Open Market Operations, ceasing currency swaps among
banks and refraining from issuing new high-powered money for government financing. The central
bank conducts weekly repo auctions, supporting market-based interest rate adjustments.
Additionally, an interest rate targeting framework was introduced in July 2023 to replace the
previous monetary targeting system. This framework allows BB to exercise greater control over
short-term interest rates, aiding effective monetary policy transmission.

3.3.3 Managed Exchange Rate and Foreign Exchange Stability

BB adopted a crawling peg system in May 2024, pegging the Taka to a currency basket aligned
with the Real Effective Exchange Rate (REER) index. This system reduces exchange rate volatility
by allowing gradual adjustments within a set band, mitigating abrupt changes that could impact
inflation and foreign exchange reserves. The Taka's mid-rate is fixed at Tk. 117 per USD. This
measure also aims to reduce the disparity between the official and informal exchange rates,
promoting stability in forex markets.
3.3.4 Measures to Increase Foreign Exchange Reserves

BB has introduced policies to enhance foreign exchange inflows, such as allowing Non-Resident
Bangladeshis (NRBs) to invest in premium bonds and simplifying procedures for opening Non-
Resident Foreign Currency Deposit (NFCD) accounts. Offshore Banking Act 2024 has also been
enacted to provide a stronger framework for foreign investment and currency inflow.

3.4 Sectoral Support Measures

3.4.1 Support for Agriculture and CMSMEs

BB continues to provide low-cost credit support to the agricultural sector and CMSMEs, key
drivers of employment and economic growth. Refinance schemes for these sectors ensure
accessible and affordable financing, supporting domestic production and reducing import reliance.
This approach aligns with the government's vision for increased financial inclusion and rural
development.

3.4.2 Encouraging Investment in Productive Sectors

To promote economic productivity, BB has introduced financial incentives, including refinance

schemes for export-oriented industries and capital market stabilization funds. These measures are
intended to encourage investments that have a positive impact on the economy’s productive
capacity, particularly in sectors like manufacturing and real estate.

3.5 Inflation Management

3.5.1 Contractionary Measures

The central bank's tightening measures include increasing policy rates and restricting liquidity
through OMOs, aiming to curb inflationary pressures. Additionally, BB has raised interest rates
on key financial instruments, encouraging savings while restraining consumer spending. Efforts to
reduce non-performing loans (NPLs) in the banking sector also indirectly support inflation control
by improving credit discipline and efficiency.

3.5.2 Price Stabilization Efforts

BB has coordinated with the government to reduce tariffs on essential imports and strengthen
social protection schemes like Open Market Sales (OMS) to mitigate the impact of high food prices
on inflation. Import restrictions on luxury goods further reduce pressure on foreign exchange
reserves and prevent additional inflationary effects from import costs.

3.6 Interest Rate Adjustments and Financial Sector Reform

BB has removed the cap on interest rates under the SMART system, enabling a market-driven
approach to interest rate determination. Banks now set lending rates based on market dynamics
and the credit risk of borrowers, which has led to increased interest rates for both lending and
deposits. By allowing flexibility in interest rates, BB aims to improve the allocation of credit,
encourage prudent lending, and align market interest rates with policy objectives.

3.7 Addressing Liquidity Challenges and Non-Performing Loans

The central bank has implemented several measures to address liquidity constraints and high NPLs
in the banking system:

1. Liquidity Support: Facilities such as repo, Assured Liquidity Support (ALS), and Islamic
Banks Liquidity Facility (IBLF) provide liquidity to banks, supporting operational stability.

2. Non-Performing Loan Management: BB has set a target to reduce NPL ratios in both state-
owned and private commercial banks. Efforts include identifying willful defaulters, revising loan
write-off policies, and encouraging Alternative Dispute Resolution (ADR) to expedite loan
recovery.
3.8 Macroeconomic Outlook and Forward-Looking Policies

BB anticipates continued global inflation moderation, which, coupled with domestic tightening, is
expected to bring CPI inflation to around 6.5% by the end of FY25. Bangladesh's growth is
projected to rebound, supported by increased private sector investment, remittances, and export
expansion. BB’s forward-looking policy initiatives, such as digital financial inclusion, enhanced
governance standards, and a gradual move towards a fully flexible exchange rate, are expected to
strengthen economic resilience and stability.

Bangladesh Bank’s monetary policy for H1FY25 is a multifaceted approach to tackle

inflation, stabilize the exchange rate, and bolster foreign exchange reserves while supporting
growth in strategic sectors. The focus on tightening liquidity, adopting a crawling peg exchange
rate system, and streamlining financial sector operations illustrates BB's commitment to
maintaining economic stability amid global and local challenges. This policy stance aims to create
a resilient financial environment conducive to sustainable growth, ensuring Bangladesh's
economic momentum continues in a stable and inclusive manner.

Note: The policy rates outlined here reflect the prevailing conditions at the time this chapter
was prepared. While they may be adjusted in response to changes in the economic
environment, these rates are accurate as of the current writing.
3.9 Critique of the Monetary Policy of Bangladesh (H1FY25)

The current monetary policy of Bangladesh, as outlined for the first half of FY25, attempts to
address macroeconomic stability by maintaining high-interest rates, managing inflation, and
adopting a crawling peg exchange rate system. While these efforts reflect Bangladesh Bank’s
commitment to controlling inflation and stabilizing the currency, several challenges and
limitations emerge upon examination.

1. Effectiveness in Managing Inflation

The policy’s tight stance aims to lower inflation to 6.5% by the end of FY25, but inflation
remains stubbornly above 9%. The reliance on increased interest rates as a primary tool has raised
borrowing costs, affecting both businesses and consumers. This approach may fail to address the
supply-side factors driving inflation, particularly in food and energy sectors, where inflation rates
are especially high.

2. Liquidity Constraints and Credit Growth

The policy's contractionary measures have led to a liquidity crunch in the banking sector. The
restriction of money supply, coupled with high borrowing costs, has constrained private sector
credit growth, which fell below projections in FY24. This constraint could impede business
expansion and investment, which are essential for sustaining economic growth.

3. Exchange Rate Management Issues

The adoption of a crawling peg system, pegging the Taka to a currency basket, is intended to
stabilize the exchange rate. However, the demand for USD in the open market remains high due
to a significant trade deficit and a fall in export earnings. The system’s reliance on foreign
exchange interventions has eroded FX reserves, further limiting Bangladesh Bank’s ability to
support the Taka during currency fluctuations.

4. Impact on Foreign Exchange Reserves

Bangladesh's foreign exchange reserves are under considerable pressure, declining from USD
24.75 billion at the end of FY23 to approximately USD 19.8 billion by mid-2024. Bangladesh
Bank’s continued sale of USD to maintain currency stability has contributed to this depletion,
putting the economy at risk of inadequate reserves to cover essential imports and foreign debt
obligations.

5. Non-Performing Loans (NPL) and Financial Sector Stability

The persistent problem of high NPLs in Bangladesh's banking sector has hindered efficient
monetary policy transmission. The current policy does attempt to address NPLs by setting
reduction targets; however, without significant structural reforms, the effectiveness of these
measures remains uncertain. High NPL levels reduce the availability of credit for productive
investments, further affecting economic growth.

3.10 Recommendations for Improvement

To address these challenges, a multi-faceted approach that includes structural reforms, diversified
monetary tools, and enhanced policy coordination is essential.

1. Balanced Inflation Management

- Supply-Side Interventions: A balanced approach that combines monetary tightening with

supply-side measures, especially in food and energy, can help control inflation more effectively.
The government should work with Bangladesh Bank to improve agricultural productivity and
energy supplies, helping to stabilize food and fuel prices and reduce inflationary pressures from
these critical sectors.

- Targeted Subsidies: Temporary subsidies for essential commodities and support for low-
income households can help mitigate the adverse impact of inflation without overstretching
monetary policy measures.

2. Enhancing Liquidity and Supporting Credit Growth

- Targeted Credit Programs: Bangladesh Bank should consider targeted refinance schemes for
key sectors such as agriculture, CMSMEs, and export-oriented industries, providing them with
lower-cost credit. This will support employment and output growth, cushioning the economy
against tight liquidity constraints.

- Alternative Funding Sources: Encouraging commercial banks to seek foreign funding

sources, such as syndicated loans or external credit lines, could help ease liquidity constraints.
Bangladesh Bank can play a facilitating role in this regard by providing necessary guidelines and
oversight.

3. Exchange Rate Flexibility and FX Reserve Rebuilding

- Gradual Transition to a Flexible Exchange Rate: A fully flexible exchange rate regime
should be introduced gradually. This would allow the market to determine the value of the Taka,
reduce the burden on Bangladesh Bank’s reserves, and limit speculative attacks on the currency.

- Diversifying Reserve Sources: Increasing remittance flows and FDI is critical for building FX
reserves. Bangladesh Bank could consider enhancing incentives for Non-Resident Bangladeshis
(NRBs) to invest in domestic bonds or deposit schemes. Additionally, simplifying regulations for
foreign direct investment can make Bangladesh more attractive to international investors.
4. Addressing Structural Challenges in the Financial Sector

- Reducing NPLs: Bangladesh Bank should enforce stricter lending criteria and establish a
transparent mechanism for identifying willful defaulters. Additionally, strengthening Alternative
Dispute Resolution (ADR) frameworks can expedite loan recovery and improve overall asset
quality.

- Improving Governance in Banking: Introducing stricter governance norms for banks and
creating an independent banking oversight committee can reduce malpractices and improve trust
in the banking system, promoting better financial sector stability.

5. Strengthening Monetary Policy Coordination and Communication

- Enhanced Policy Coordination: Bangladesh Bank should closely coordinate with fiscal
authorities to ensure that monetary policy efforts are supported by appropriate fiscal measures. For
instance, fiscal consolidation, including targeted spending cuts and efficient tax collection, can
help reduce the government’s reliance on domestic borrowing, easing pressure on the banking
sector.

- Transparent Communication: Clear and consistent communication of monetary policy

intentions and updates can help manage market expectations. Bangladesh Bank should continue to
publish regular updates and detailed analyses on inflation targets, FX reserves, and policy
adjustments to provide transparency and build confidence among investors and the public.

The monetary policy of Bangladesh for H1FY25 highlights Bangladesh Bank’s proactive
measures to tackle inflation and maintain currency stability. However, the policy faces challenges
due to tight liquidity conditions, FX reserve depletion, and structural issues in the banking sector.
A well-coordinated approach that incorporates supply-side solutions, structural reforms, and
policy transparency will be essential for achieving sustainable economic stability and growth in
Bangladesh.
 Chapter - IV: Reserve Management Policy of Bangladesh

4.1 Introduction to Reserve Management

Bangladesh Bank, the central bank of Bangladesh, manages the country's foreign exchange (FX)
reserves with the primary objectives of supporting economic stability, ensuring adequate liquidity
for external payments, and safeguarding against potential financial crises. Effective reserve
management is critical for maintaining confidence in the country’s financial system, enabling
Bangladesh to manage exchange rate fluctuations, cover import costs, and service external debts.

35000

30000

25000

20000
Foreign Exchange Reserves
(Gross)
15000
Foreign Exchange Reserves (as
per BPM6)
10000

5000

0
Jun-24
Dec-23
Aug-23

Oct-23

Mar-24
Apr-24
May-24

Aug-24

Oct-24
Nov-23

Jan-24
Jul-23

Sep-23

Feb-24

Jul-24

Sep-24

Fig: FX Reserve of Bangladesh (Source bb.org.bd)

4.2 Objectives of Reserve Management

The main goals of Bangladesh's reserve management policy are as follows:

1. Liquidity: Ensuring that sufficient reserves are available to meet short-term external
obligations, such as import payments and debt servicing, thus avoiding any disruptions in foreign
payments.

2. Safety: Investing the reserves in secure assets to protect the capital against risks. This typically
involves placing reserves in low-risk assets like government bonds and highly rated foreign
financial instruments.

3. Return: While liquidity and safety are prioritized, Bangladesh Bank also aims to earn a modest
return on the reserves, which supports the sustainability of reserve growth over time.

4.3 Structure of Bangladesh’s FX Reserves

The FX reserves in Bangladesh are primarily composed of foreign currencies (mainly USD), gold
holdings, and Special Drawing Rights (SDRs) with the International Monetary Fund (IMF). As of
recent reports, Bangladesh Bank has diversified reserve holdings into different currencies and
financial instruments to manage risks associated with any one currency's volatility.

4.4 Recent Decline in FX Reserves in Bangladesh

The foreign exchange reserves in Bangladesh have seen a significant decline in recent years. As
shown in recent data, reserves dropped from USD 29.7 billion in July 2023 to around USD 19.8
billion by September 2024【28†source】. This sharp decline has raised concerns regarding the
country’s ability to cover import bills and maintain currency stability. Several factors contribute
to this decline:

1. High Import Bills: Increased global prices for essential commodities, including food, energy,
and raw materials, have raised Bangladesh’s import costs, thus depleting the FX reserves as more
funds are spent to cover these imports.

2. Taka Depreciation: The Taka’s depreciation against the USD has led to greater expenditure on
imports, increasing demand for foreign currency and contributing to reserve outflows.

3. Low Export and Remittance Growth: While remittances and exports are major sources of
foreign exchange, their growth has been slower than expected. Export revenues were adversely
affected by a slowdown in demand from major trade partners, and remittance inflows faced
challenges due to regulatory changes in source countries.
4. Debt Servicing and Repayments: Bangladesh’s rising external debt obligations require
substantial foreign currency payments, which further strains the reserves.

5. Geopolitical Tensions: External uncertainties, such as the Russia-Ukraine conflict and

inflationary pressures in global markets, have also impacted the balance of payments and reserve
stability.

4.5 Reserve Management Strategies to Address the Decline

To overcome the reserve challenges, Bangladesh Bank and the government have adopted several
strategies:

1. Adopting a Managed Exchange Rate System: In May 2024, Bangladesh Bank introduced a
"crawling peg" exchange rate system, pegging the Taka to a basket of currencies. This approach
reduces exchange rate volatility and enhances stability in the FX market by aligning the currency
value more closely with market conditions. It helps mitigate the pressure on reserves caused by
speculative currency trades.

2. Import Restriction Measures: Bangladesh has restricted imports of non-essential and luxury
goods, helping to conserve FX reserves by focusing resources on essential imports. This policy
also aligns with efforts to narrow the trade deficit.

3. Encouraging Remittance Inflows: Bangladesh Bank has introduced incentives and simplified
procedures to boost remittances from Non-Resident Bangladeshis (NRBs). Policies such as
enhancing interest rates on foreign currency bonds and allowing NRBs to invest more easily have
been introduced to stimulate foreign inflows.

4. Foreign Assistance and External Financing: The government has sought budget support and
development assistance from international organizations like the IMF and the World Bank. These
sources provide financial relief, which can bolster reserves and reduce immediate external pressures.

5. Strengthening Export Competitiveness: The government has also introduced incentives for
export-oriented industries and is focusing on diversifying export products and markets to sustain
export earnings. A stronger export sector can contribute to reserve growth in the long term.
 Foreign Exchange Reserve (Monthly)

(In million US $)

Foreign Exchange Reserves Foreign Exchange Reserves

Period
(Gross) (as per BPM6)

2024-2025

September 24863.0 19861.5

August 25580.8 20475.4

July 25823.6 20393.7

2023-2024

June 26714.2 21686.3

May 24197.2 18646.2

April 25365.2 19975.8

March 25231.7 19913.0

February 25966.6 20780.0

January 25111.9 19963.5

December 27130.0 21867.6

November 24894.6 19300.6

October 26481.0 20710.2

September 26911.0 21059.8

August 29260.7 23255.1

July 29732.1 23374.3

Note: Reserves (Gross) represents Total International Reserves of the country.
Source: Accounts & Budgeting Department, Bangladesh Bank.
4.6 Future Outlook and Recommendations

Given the current reserve management strategies, Bangladesh’s FX reserve situation is expected
to stabilize gradually. However, several additional measures can be adopted to ensure long-term
reserve adequacy:

1. Promoting a Flexible Exchange Rate Regime: Moving gradually from a crawling peg to a
fully flexible exchange rate can help the FX market adjust naturally to supply and demand, thereby
reducing reserve depletion in managing the currency.

2. Implementing Structural Reforms: Enhancing financial sector resilience, addressing non-

performing loans, and improving governance in state-owned banks can strengthen the economy’s
structural foundation, indirectly supporting reserve management.

3. Boosting Domestic Production: By encouraging self-sufficiency in key industries, such as

agriculture and energy, Bangladesh can reduce its dependency on imports, leading to reduced
foreign currency outflows over time.

4. Incentivizing Foreign Direct Investment (FDI): Creating favorable conditions for foreign
investment can generate foreign currency inflows, diversifying and strengthening reserve sources
beyond exports and remittances.

Bangladesh Bank’s reserve management policy has been adapted to address the current
economic challenges, with a focus on stabilizing reserves through targeted measures like import
restrictions, exchange rate adjustments, and encouraging remittances. Although FX reserves have
declined sharply, these strategies aim to stabilize and eventually rebuild reserves. By
implementing additional reforms and enhancing domestic production, Bangladesh can strengthen
its reserve position, ensuring economic resilience and financial stability in the face of future
external shocks.
 Chapter V: Various Issues of the Banking Sector in Bangladesh

The banking sector in Bangladesh is a critical component of the national economy, driving
investment, supporting businesses, and enabling financial inclusion. Despite its significant role,
the sector faces numerous challenges that undermine its effectiveness and threaten economic
stability. This chapter provides an in-depth examination of the key issues within the banking sector
in Bangladesh, focusing on problems like non-performing loans (NPLs), governance weaknesses,
regulatory constraints, liquidity issues, and cyber threats.

5.1 High Levels of Non-Performing Loans (NPLs)

One of the most pressing issues facing the banking sector in Bangladesh is the high level of non-
performing loans (NPLs). NPLs refer to loans that are not being repaid as per the terms agreed
upon, making them a substantial risk for the financial system. In Bangladesh, NPLs have
consistently exceeded acceptable levels, with rates reaching around 8-10% of total loans in recent
years, well above international standards.

The factors contributing to high NPL levels include:

1. Poor Lending Practices: Weak credit assessments and insufficient collateral requirements have
led to risky lending decisions, especially in state-owned banks.

2. Political Influence: Many loans are granted under political influence, leading to loans being
sanctioned to entities with low creditworthiness.

3. Lack of Effective Recovery Mechanisms: Legal hurdles and an inefficient judicial system
make it difficult to recover outstanding loans, resulting in a backlog of unresolved cases.

The consequences of high NPLs are severe, impacting banks' profitability and their ability to
extend further credit, which in turn stifles economic growth.

5.2 Weak Governance and Regulatory Oversight

Governance issues have been a persistent problem in Bangladesh's banking sector. Poor
governance practices in many banks have led to inefficiency, fraud, and mismanagement. Weak
oversight has allowed for problems like loan defaults and unauthorized transactions to go
unchecked.

- Corporate Governance Issues: A lack of corporate governance has led to problems such as
nepotism in senior appointments, inadequate board supervision, and conflicts of interest.
- Regulatory Constraints: Bangladesh Bank, the central regulatory authority, faces limitations in
its ability to monitor and control banking operations effectively. Political pressure often influences
regulatory decisions, which can result in lax enforcement of policies.

- Compliance Issues: Many banks have been slow to adopt global regulatory standards, such as
Basel III, which require stricter capital adequacy ratios and risk management practices.

Improving governance and regulatory oversight is essential for ensuring stability and enhancing
public confidence in the banking sector.

5.3 Liquidity Constraints and Capital Shortfalls

Bangladesh's banking sector has been grappling with liquidity issues, exacerbated by high NPLs
and mismanagement of funds. Capital shortfalls are especially prevalent among state-owned
banks, where large portions of assets are locked in NPLs.

- Liquidity Crunch: Tight liquidity conditions make it difficult for banks to meet their obligations,
affecting interbank lending and interest rates.

- Capital Adequacy Issues: Many banks struggle to meet the capital adequacy ratios set by
Bangladesh Bank. This problem is more pronounced in state-owned banks, which face pressure to
lend to high-risk borrowers and support government initiatives.

The liquidity and capital adequacy issues restrict banks' ability to lend, impacting overall economic
growth. To strengthen the sector, it is necessary to bolster liquidity through prudent asset
management and meet capital requirements as per regulatory standards.

5.4 Cybersecurity and Digital Banking Risks

With the increasing adoption of digital banking and mobile financial services, cybersecurity has
become a crucial issue for the banking sector in Bangladesh. Cyber threats expose banks and their
customers to the risks of financial loss and data breaches.

- Limited Cybersecurity Infrastructure: Many banks lack advanced cybersecurity measures,

making them vulnerable to hacking and fraud.

- Growing Incidence of Digital Fraud: With the rise of mobile banking, digital fraud cases have
also surged, impacting customer trust and banks' reputations.

- Inadequate Cybersecurity Skills: A shortage of skilled cybersecurity professionals within the

banking sector exacerbates these vulnerabilities, limiting the capacity to respond to cyber threats
effectively.
Enhancing cybersecurity infrastructure, investing in training for IT personnel, and implementing
international best practices are critical for safeguarding the sector against these emerging threats.

5.5 Weak Financial Inclusion

Despite efforts to promote financial inclusion, a large portion of Bangladesh’s population remains
unbanked or underbanked, particularly in rural areas. Financial inclusion is essential for economic
growth, poverty reduction, and social development.

- Limited Access to Formal Banking: Many rural areas lack banking infrastructure, making it
difficult for people to access basic financial services.

- Barriers for Women and Low-Income Groups: Gender and income disparities also limit access
to banking, with women and low-income individuals facing greater challenges in accessing loans
and financial products.

- Dependency on Informal Credit: Due to limited access to formal banking, many people rely
on informal lending, which often involves high interest rates and exploitative practices.

Increasing financial inclusion is critical to expanding the customer base for banks and supporting
broader economic growth.

5.6 Foreign Exchange Volatility

Bangladesh’s banking sector faces foreign exchange (FX) volatility, particularly due to
fluctuations in the value of the Taka against the USD and other major currencies. This volatility
affects foreign exchange reserves, import costs, and overall economic stability.

- Depreciating Taka: The depreciation of the Taka has increased the cost of imports, placing strain
on the country’s foreign exchange reserves.

- Trade Imbalance: Bangladesh’s trade imbalance contributes to foreign exchange volatility, with
the country’s high import demand outweighing its export earnings.

- Impact on Foreign Debt Servicing: A weaker Taka raises the cost of servicing foreign debt, which
is a burden on banks with significant foreign liabilities.

Addressing FX volatility requires coordinated measures that strengthen foreign reserves and
support a stable exchange rate environment.
Recommendations

To overcome these issues and strengthen the banking sector, a series of reforms are necessary:

1. Reducing NPLs: Banks should improve their credit evaluation processes and avoid politically
influenced lending decisions. Introducing stronger mechanisms for loan recovery and pursuing
Alternative Dispute Resolution (ADR) methods could expedite the process of settling outstanding
loans.

2. Enhancing Governance and Transparency: Bangladesh Bank should introduce stricter

corporate governance guidelines and enforce compliance to mitigate mismanagement. Setting up
an independent banking oversight body may also improve transparency and accountability.

3. Strengthening Capital Adequacy and Liquidity: The government should consider injecting
capital into state-owned banks to support their capital requirements. Encouraging private banks to
raise capital from foreign investors could help address capital shortfalls.

4. Improving Cybersecurity: Banks need to invest in cybersecurity infrastructure, including

multi-layered security systems, and develop protocols for managing digital threats. Regular
training and capacity-building initiatives should be undertaken to create skilled cybersecurity
personnel within the banking sector.

5. Promoting Financial Inclusion: Expanding banking infrastructure in rural areas, offering

digital financial services, and designing products targeted at women and low-income groups can
enhance financial inclusion. Partnerships with fintech companies could also support innovative
solutions to reach underserved populations.

6. Managing FX Volatility: To manage FX volatility, Bangladesh Bank should consider a more

flexible exchange rate policy and promote export diversification to reduce dependency on specific
markets. Strengthening remittance channels and incentivizing foreign direct investment (FDI) can
also support FX reserves.

By addressing these issues with targeted and effective policies, Bangladesh's banking sector can
strengthen its role in supporting economic growth and financial stability, positioning itself as a
resilient component of the national economy.
 Chapter VI: Banking Sector Reformation
6.1 What is Reformation?

Reformation is a process of making substantial changes or improvements to a system to address

existing issues, adapt to changing needs, or promote growth. In the context of the banking sector,
reformation involves the restructuring of policies, practices, and institutions to improve the sector's
stability, efficiency, and responsiveness to economic needs. It often includes regulatory upgrades,
technological advancements, governance improvements, and structural adjustments like mergers
and acquisitions.

6.2 Why Does the Banking Sector in Bangladesh Need Reform?

The banking sector in Bangladesh is essential to the economy but is plagued by multiple issues,
including high levels of non-performing loans (NPLs), poor governance, insufficient capital, and
liquidity constraints. These challenges have led to inefficiency, reduced investor confidence, and
limited access to credit for businesses and individuals. Additionally, Bangladesh’s banking sector
is facing pressures from globalization, digital transformation, and evolving economic demands,
making reform essential for:

1. Addressing Non-Performing Loans (NPLs): High NPL levels hinder banks' profitability and
reduce their ability to lend. Reform can help banks adopt stricter credit evaluations and better risk
management practices.

2. Improving Governance and Reducing Corruption: Weak governance and political influence
have led to inefficient management practices. Reform can establish stronger governance structures
that reduce malpractice and enhance transparency.

3. Enhancing Financial Stability: With declining foreign exchange reserves and liquidity
challenges, reforms are necessary to strengthen the capital base and stabilize the banking sector.

4. Adapting to Technological Changes: With the rise of digital banking and mobile transactions,
reform is essential for improving cybersecurity, fostering innovation, and meeting customer
expectations.

5. Promoting Financial Inclusion: Reform can help extend banking services to underserved
populations, thereby improving access to financial resources for individuals and small businesses.
6.3 Essential Reforms Needed in the Banking Sector

To address these challenges, several key reforms should be implemented in Bangladesh’s banking
sector:

1. Strengthening Regulatory Oversight: Bangladesh Bank, as the central regulator, needs to

enforce stronger compliance standards, including adopting international norms like Basel III,
which mandate adequate capital and risk management practices.

2. Reducing Non-Performing Loans: Establishing effective credit risk management frameworks,

regular loan monitoring, and stricter recovery processes will help banks mitigate credit risk and
reduce NPLs.

3. Improving Corporate Governance: Implementing transparent recruitment, ethical practices,

and accountability mechanisms will help in reducing conflicts of interest and improving
governance.

4. Adopting Technology and Cybersecurity Measures: Banks need to invest in advanced

cybersecurity frameworks and digital banking platforms to ensure secure, efficient service
delivery.

5. Encouraging Financial Inclusion: Expanding banking infrastructure in rural areas, enhancing

mobile financial services, and offering microfinance products will support financial inclusion.

6. Enhancing Capital Adequacy: Banks, especially state-owned ones, need to meet regulatory
capital requirements to maintain a healthy financial status. The government may need to inject
capital into public banks, while private banks can seek foreign investment.

6.4 Merger and Acquisition (M&A) in Banking Sector

6.4.1 Understanding Mergers and Acquisitions

Mergers and Acquisitions (M&A) are processes where two or more financial institutions
consolidate to form a single entity (merger) or one institution takes over another (acquisition). In
the banking sector, M&A are strategic tools used to enhance competitiveness, reduce
inefficiencies, and strengthen financial stability.

- Merger: Involves the combination of two or more banks into a single institution, where resources,
operations, and customer bases are unified.
- Acquisition: Involves one bank purchasing another to expand its market share, product offerings,
or geographical presence.

6.4.2 Importance of M&A in the Banking Sector

Mergers and acquisitions play a critical role in the banking sector by helping banks scale up,
improve efficiency, and achieve financial stability. M&As provide numerous benefits, including:

1. Improving Capital Adequacy and Resilience: Through consolidation, banks can strengthen
their capital base and meet regulatory requirements more easily.

2. Reducing Operational Costs: M&As allow banks to eliminate redundancies, optimize resource
allocation, and reduce operational costs, leading to better profitability.

3. Expanding Customer Reach and Market Share: Consolidated banks gain larger customer
bases and geographical coverage, which can enhance their competitive position and support
growth.

4. Enhancing Risk Management Capabilities: Larger institutions formed through mergers can
better absorb financial shocks, thereby improving overall financial stability.
5. Enabling Technological Advancements: M&As often lead to improved digital infrastructure,
as larger banks have more resources to invest in technology.

6.5 Will Merger and Acquisition Help Reduce Issues in the Banking Sector of Bangladesh?

M&A can be a beneficial tool for addressing several structural challenges within Bangladesh’s
banking sector, particularly by reducing high levels of NPLs, improving governance, and
enhancing financial stability. Here’s how M&A could help:

1. Reducing Non-Performing Loans: By consolidating weaker banks with stronger ones, M&As
can reduce the overall NPL burden and create more financially stable entities that can better
manage credit risk. With fewer banks, Bangladesh Bank would also find it easier to regulate and
monitor credit quality.

2. Improving Governance and Efficiency: M&As can lead to better governance by integrating
the expertise of stronger banks with a sound management structure. The consolidation process may
enforce better practices and streamline decision-making, reducing malpractices and inefficiencies.

3. Strengthening Capital Base: Mergers allow for pooling of capital resources, helping banks
meet regulatory requirements and reducing the government’s burden of recapitalizing state-owned
banks.

4. Enhancing Digital Infrastructure: Larger institutions with better financial resources can
invest in the latest technologies and cybersecurity measures. This helps in offering improved
digital banking services and safeguarding against cyber threats.

5. Promoting Financial Inclusion: Consolidated banks with stronger networks and resources are
better positioned to reach rural and underserved areas, extending banking services to more people.
 The banking sector in Bangladesh faces numerous challenges that require immediate and
comprehensive reforms. While traditional reforms such as improved governance, stronger
regulations, and better risk management are essential, Mergers and Acquisitions (M&A) offer a
valuable solution for addressing structural weaknesses in the sector. By consolidating weaker
institutions with stronger ones, M&As can enhance capital adequacy, reduce non-performing
loans, improve governance, and extend financial inclusion.

Reforming the banking sector through a combination of strategic M&As and regulatory
improvements can create a more resilient and efficient financial system, supporting Bangladesh's
economic stability and growth.
 Chapter VII: Modernization of the Banking Sector

As the financial sector in Bangladesh progresses, modernization has become central to its
development, allowing banks to provide efficient, accessible, and customer-centric services.
Modernization includes advances in digital banking, FinTech, Central Bank Digital Currency
(CBDC), and payment systems. Each of these components not only addresses customer
convenience but also aims to improve overall financial inclusion and economic growth. This
chapter examines the modernization of Bangladesh’s banking sector, highlighting modes,
facilities, prospects, and the challenges encountered in implementing these advancements.

7.1 Digital Banking in Bangladesh

Digital banking refers to the digitalization of traditional banking services, enabling customers to
conduct banking activities online through websites, apps, and digital channels. In Bangladesh,
digital banking has grown significantly, especially with mobile and internet banking, offering
convenience and real-time access to financial services.

Modes and Facilities

1. Mobile Banking: Services like bKash, Rocket, and Nagad enable users to perform transactions,
transfer funds, pay bills, and access savings and credit services through their mobile phones.

2. Internet Banking: Bank-specific platforms, such as those by BRAC Bank and Dutch-Bangla
Bank, allow customers to conduct online transactions, view account information, and manage
funds from any internet-enabled device.

3. Automated Teller Machines (ATMs) and POS Terminals: The widespread use of ATMs and
POS terminals enables quick cash withdrawal, deposits, and payments at retail locations.
4. SMS Banking: A more basic service where users can perform specific tasks like balance
inquiries and mini-statements via SMS without needing internet access.

Challenges

Despite its progress, digital banking in Bangladesh faces several challenges:

- Digital Literacy: A significant portion of the population lacks digital literacy, limiting the use
of digital banking services.
- Cybersecurity Concerns: With increasing digital transactions, the risk of cyberattacks and fraud
also rises, requiring stronger security protocols.
- Network and Infrastructure Issues: Inadequate internet connectivity and technological
infrastructure, particularly in rural areas, hinder the seamless operation of digital banking.
- Regulatory Compliance: Digital banking needs consistent updates in regulatory policies to
ensure secure transactions and protect user data.

7.2 The Prospect of FinTech in Bangladesh

FinTech (Financial Technology) refers to technological innovation in financial services, covering

a wide range of services including payments, lending, insurance, and asset management. FinTech
in Bangladesh has emerged as a transformative force, promoting financial inclusion and creating
innovative solutions for underserved communities.
Modes and Facilities

1. Digital Payments: Digital wallets and QR code-based payments, supported by platforms like
bKash, Nagad, and Upay, enable cashless transactions across the country.

2. Peer-to-Peer Lending: Digital lending platforms allow individuals to lend and borrow without
traditional banks, enabling more access to credit for small businesses and individuals.

3. InsurTech: FinTech innovations in the insurance sector, such as digital claim processing and
micro-insurance, aim to make insurance more accessible to a broader population.

4. RegTech (Regulatory Technology): Technologies that help banks comply with regulations
more efficiently, thus reducing compliance costs and enhancing transparency.

Challenges

While promising, FinTech in Bangladesh faces certain hurdles:

- Regulatory Limitations: Bangladesh’s FinTech sector lacks a comprehensive regulatory

framework, creating challenges for compliance and scalability.
- Trust and Adoption: Many people are skeptical about online financial transactions due to
limited understanding and awareness.
- Funding and Investment: FinTech startups often struggle to secure investment, which is critical
for their growth and expansion.

7.3 Central Bank Digital Currency (CBDC) in Bangladesh

A Central Bank Digital Currency (CBDC) is a digital form of a country’s fiat currency issued and
regulated by its central bank. Bangladesh Bank is exploring the potential of a digital Taka to
modernize its monetary system, reduce the costs associated with physical currency, and promote
digital transactions.

Modes and Facilities

1. Retail CBDC: Targeted at the general public, a retail CBDC would allow consumers to conduct
digital payments and transfers directly through a central bank-issued digital wallet, potentially
accessible via mobile devices.
2. Wholesale CBDC: Focused on financial institutions, a wholesale CBDC could streamline
interbank transfers and improve settlement efficiency, reducing transaction times and costs.

3. Cross-Border Payments: A CBDC can enhance cross-border payment systems by reducing

transaction fees and processing times, benefiting international trade and remittances.

Challenges

Implementing a CBDC in Bangladesh involves significant challenges:

- Technical and Infrastructure Demands: Developing a secure and efficient CBDC

infrastructure requires advanced technology, which could strain existing financial infrastructure.
- Cybersecurity Risks: As a digital currency, a CBDC is vulnerable to cyberattacks, making it
essential to establish robust security measures.
- Impact on Traditional Banking: CBDCs could reduce the role of commercial banks, as
customers might prefer to hold digital currency directly with the central bank, impacting banks'
deposits and lending activities.
- Public Acceptance: Educating the public and gaining their trust in a new form of currency is
crucial for CBDC adoption.
7.4 Advancement of Payment Systems in Bangladesh

The advancement of payment systems in Bangladesh has significantly improved financial

transactions, enabling faster, secure, and more efficient processing. The introduction of real-time
payments, interoperable payment networks, and digital clearing systems has transformed the
country’s financial landscape.

Modes and Facilities

1. Real-Time Gross Settlement (RTGS): Bangladesh Bank’s RTGS system allows instant, large-
value interbank transactions, streamlining business and institutional payments.

2. National Payment Switch Bangladesh (NPSB): The NPSB facilitates interoperability among
banks and mobile financial services, enabling seamless ATM and POS transactions across different
banks and networks.

3. Digital Wallets and QR Payments: The rise of mobile wallets and QR code-based payments
offers a convenient and cashless payment option for individuals and small businesses.

4. Automated Clearing House (ACH): The ACH system, including Bangladesh Automated
Clearing House (BACH), allows for electronic check clearing and bulk transactions, reducing
processing time and costs.
Challenges

While Bangladesh’s payment systems have advanced considerably, there are challenges to
address:

- Interoperability Limitations: Not all payment systems in Bangladesh are fully interoperable,
which limits the flexibility of digital transactions.
- Digital Fraud and Cybersecurity: As digital transactions increase, so do incidents of fraud and
cyberattacks, necessitating stronger security protocols.
- Accessibility in Rural Areas: Many rural areas still lack access to digital payment systems due
to limited internet and infrastructure.
- Cost of Transactions: Fees associated with some digital payment systems may discourage
smaller businesses and low-income individuals from adopting digital payments.

The modernization of Bangladesh’s banking sector is advancing rapidly through digital banking,
FinTech, CBDC initiatives, and payment system improvements. Each of these advancements has
the potential to enhance financial inclusion, reduce costs, and improve service efficiency.
However, to realize these benefits, Bangladesh must address challenges such as regulatory
limitations, digital literacy, and cybersecurity risks. By overcoming these challenges, the banking
sector in Bangladesh can offer more accessible, secure, and efficient services to all segments of
the population, driving economic growth and development.
 Chapter VIII: Welfare Activities of Banking Sector in BD

Bangladesh’s banking sector is rapidly evolving, with financial inclusion, SME growth,
agricultural credit, sustainable finance, and corporate social responsibility (CSR) emerging as
essential pillars. Together, they address economic, social, and environmental priorities critical to
achieving a resilient and inclusive financial ecosystem. This chapter examines each of these pillars,
the roles they play, and the challenges and strategies for improvement.

8.1 Financial Inclusion

Financial inclusion in Bangladesh aims to ensure that individuals and businesses across all
regions and income levels have access to financial services, helping to alleviate poverty and foster
economic growth.

Key Efforts in Financial Inclusion

1. Mobile Financial Services (MFS): Services like bKash and Nagad facilitate money
transfers and bill payments, reaching remote areas where traditional banks are scarce.

2. Agent Banking: Through partnerships with local agents, banks provide services to rural
populations, offering deposits, withdrawals, and loan facilities outside conventional bank
branches.

3. Microfinance Institutions (MFIs): Organizations like Grameen Bank and BRAC deliver
credit to low-income individuals, especially women, empowering them economically.

Challenges and Recommendations

Barriers like low digital literacy, limited infrastructure, and gender disparity hinder
financial inclusion efforts. To overcome these, investments in digital education, rural
infrastructure, and inclusive financial products are essential. Policies encouraging collaborations
between banks and fintech companies could further promote financial access.

8.2 Small and Medium Enterprises (SME) Growth

SMEs are the backbone of Bangladesh’s economy, contributing significantly to

employment and GDP. However, they face financial constraints due to limited access to credit.
Role and Initiatives for SME Support

1. Refinance Schemes: Bangladesh Bank offers low-interest loans to SMEs, prioritizing

those led by women and located in underserved areas.

2. Credit Guarantee Schemes: These help SMEs secure loans without traditional collateral,
reducing financial risks for lenders.

3. Training and Capacity Building: Institutions like SME Foundation provide training to
improve SME management and financial literacy.

Challenges and Recommendations

SMEs encounter obstacles like high operational costs, strict collateral requirements, and
complex regulations. Reducing collateral demands, enhancing funding to credit guarantee
schemes, and creating SME-friendly regulatory frameworks can encourage growth. Digital
solutions can also facilitate SME financing, enhancing operational efficiency.

8.3 Agricultural Credit

Agriculture remains a cornerstone of Bangladesh’s economy, providing employment to

almost half of the workforce. Agricultural credit supports farmers, improves productivity, and
enhances food security.

Agricultural Credit Initiatives

1. Bangladesh Krishi Bank: This state-owned bank provides subsidized loans for crop
cultivation, fisheries, and livestock.

2. Agricultural Refinance Schemes: Bangladesh Bank offers banks low-interest funds to

extend affordable loans to farmers.

3. Microcredit Programs: Microfinance institutions provide small loans to marginalized

farmers, allowing them access to capital.
Challenges and Recommendations

High default rates, lack of collateral, and inadequate financial literacy are common
challenges. To improve agricultural financing, Bangladesh should offer flexible loan repayment
options, implement crop insurance schemes, and strengthen partnerships between banks and
agricultural cooperatives.

8.4 Sustainable Finance

Sustainable finance promotes environmental, social, and governance (ESG) goals, helping
Bangladesh address climate change while supporting economic resilience.

Sustainable Finance Initiatives

1. Green Bonds: Bangladesh Bank promotes green bonds to fund eco-friendly projects,
such as renewable energy and waste management.

2. Green Banking Guidelines: These guidelines direct banks to assess the environmental
and social impact of their lending practices.

3. Sustainable Refinance Schemes: Bangladesh Bank provides refinance schemes for green
projects, including solar energy and sustainable agriculture.

Challenges and Recommendations

Sustainable finance faces obstacles like limited awareness, high initial costs, and regulatory
barriers. To advance, Bangladesh needs to increase awareness, provide financial incentives for
green projects, and simplify regulations to attract green investments.

8.5 Corporate Social Responsibility (CSR)

Corporate Social Responsibility (CSR) is the practice of integrating social and

environmental considerations into business operations. In Bangladesh, CSR initiatives by banks
contribute to social welfare, environmental sustainability, and community development,
reinforcing their role as socially responsible entities.

CSR Activities in the Banking Sector

1. Community Development: Many banks fund educational programs, healthcare facilities, and
sanitation projects, especially in underserved areas.
2. Environmental Conservation: Banks invest in reforestation, waste management, and water
conservation projects to support environmental sustainability.

3. Disaster Relief and Rehabilitation: Bangladesh’s banking sector often provides financial aid and
supplies to communities affected by natural disasters, such as floods and cyclones.

4. Promoting Financial Literacy: Some banks conduct financial literacy programs to educate
people on money management, saving, and investing, helping to build a financially informed
society.

Challenges in Implementing CSR

- Lack of a Unified Framework: Bangladesh currently lacks a cohesive CSR framework for the
banking sector, leading to inconsistencies in the scope and impact of CSR initiatives.
- Resource Allocation: Smaller banks may struggle to allocate sufficient funds to CSR initiatives
due to limited resources.
- Public Awareness: There is a lack of awareness about CSR programs among the public, which
can reduce engagement and impact.

Recommendations for Strengthening CSR in the Banking Sector

To enhance CSR effectiveness, Bangladesh should develop a comprehensive CSR policy

for the banking sector, aligning initiatives with national development goals. Additionally, greater
collaboration between banks, government agencies, and NGOs can maximize the reach and impact
of CSR activities. Publicizing CSR efforts more widely can also improve awareness and
engagement, fostering a stronger sense of community responsibility.

Financial inclusion, SME support, agricultural credit, sustainable finance, and CSR are
foundational to Bangladesh’s socio-economic development. Modernizing these areas through
targeted strategies can drive inclusive growth, improve livelihoods, and contribute to a more
equitable and resilient economy. By integrating sustainable and socially responsible practices,
Bangladesh’s banking sector can play a pivotal role in fostering long-term, balanced growth.
PART – II: Sample Writing
Importance of Banking Reformation on the Banking Sector Stability of Bangladesh

The banking sector in Bangladesh has grown significantly over the years, yet it faces multiple
challenges, including high non-performing loans (NPLs), governance issues, and liquidity crises.
To build a resilient financial system, reforming the banking sector has become essential for
ensuring stability and fostering sustainable economic growth. This essay discusses why reforms in
regulation, governance, and operational efficiency are vital for stabilizing Bangladesh’s banking
sector.

The high level of NPLs in Bangladesh’s banks, which stands at around 9% of total loans, weakens
banks' financial positions and reduces their lending capacity. Reforming lending policies and
establishing stricter credit evaluation processes can help address these issues. For example, state-
owned banks, where NPLs are particularly high, need restructured governance frameworks to
reduce political influence on lending decisions. Improved loan recovery processes, including faster
legal procedures for loan defaults, can also help decrease NPL levels, which would stabilize the
sector and improve profitability.

Governance reform is another critical area, as weaknesses in governance contribute to poor

management practices and financial mismanagement. By enforcing stricter corporate governance
standards, the central bank can improve transparency and accountability within banks.
Additionally, adopting international standards such as Basel III for capital adequacy would make
banks more resilient to economic shocks. Bangladesh Bank could further strengthen the banking
sector by ensuring adherence to these standards and conducting regular audits to monitor
compliance.

Furthermore, technology-driven reforms, like digital banking and automated reporting systems,
can enhance operational efficiency and make banks more adaptable to changing economic
demands. Implementing these digital solutions can also increase financial inclusion, reaching
underserved populations and expanding the customer base.

In conclusion, banking sector reforms are critical to enhancing stability and resilience in
Bangladesh’s financial system. By addressing NPLs, improving governance, and adopting
technological advancements, the sector can build a solid foundation for sustained growth. A
stable and reformed banking system is essential for Bangladesh’s economic progress and offers
hope for a more resilient future.
 Importance of Agent Banking and SMEs
in the Rural Development of Bangladesh

Rural development is essential for balanced economic growth in Bangladesh, where a significant
portion of the population resides in rural areas. Agent banking and Small and Medium Enterprises
(SMEs) are instrumental in advancing economic activities and enhancing the quality of life in these
communities. This essay explores how agent banking and SMEs contribute to rural development
by increasing access to financial services and generating employment opportunities.

Agent banking has extended the reach of financial services to remote areas, making banking
accessible for rural populations who were previously excluded due to the lack of nearby bank
branches. Bangladesh Bank’s agent banking model allows banks to operate through local agents,
offering services such as account opening, deposits, withdrawals, and small loans. For instance,
BRAC Bank and Dutch-Bangla Bank have established agent networks across Bangladesh,
providing basic financial services to rural communities. As a result, rural residents can now access
financial services without the need to travel long distances, which encourages savings, improves
financial stability, and supports household income management.

SMEs play a vital role in creating employment and reducing poverty in rural areas. Many SMEs
in Bangladesh operate in sectors such as agriculture, fisheries, and handicrafts, which are crucial
for rural economies. With SME loans provided through refinance schemes by Bangladesh Bank,
rural entrepreneurs can access funds to start or expand businesses, fueling local economies.
According to Bangladesh Bank data, SMEs account for over 25% of the country’s GDP and
employ more than 7.8 million people, many of whom are from rural areas. The growth of SMEs
has also reduced urban migration by creating job opportunities within rural communities.

Together, agent banking and SME support stimulate economic growth, increase rural incomes,
and improve overall living standards in rural Bangladesh. In conclusion, agent banking and
SMEs are essential components for rural development in Bangladesh, fostering inclusive growth
and economic empowerment. Expanding these initiatives can pave the way for a more equitable
and prosperous rural economy.
 Importance of Agent Banking and SMEs
on Financial Inclusion in Bangladesh

Financial inclusion is a cornerstone for inclusive economic growth, allowing individuals and
businesses across all regions to access essential financial services. In Bangladesh, agent banking
and Small and Medium Enterprises (SMEs) play a pivotal role in driving financial inclusion by
bringing banking services to the unbanked and promoting entrepreneurship. This essay examines
how agent banking and SMEs contribute to expanding financial inclusion in Bangladesh.

Agent banking has been a transformative tool for reaching rural and underserved areas, where
traditional bank branches are often inaccessible. Launched under Bangladesh Bank’s initiative,
agent banking enables banks to provide basic financial services through local agents, allowing
people in remote areas to open accounts, deposit money, withdraw cash, and even access small
loans. As of recent reports, there are more than 30,000 agent banking outlets across Bangladesh,
making financial services available to millions of previously unbanked individuals. For example,
Dutch-Bangla Bank and BRAC Bank have successfully expanded their reach in rural areas through
agent banking, helping to bridge the urban-rural financial gap. By facilitating safe and accessible
banking options, agent banking has empowered individuals in rural areas to save, invest, and
manage their finances more effectively.

SMEs, on the other hand, are crucial drivers of economic participation and financial inclusion.
They account for over 80% of industrial employment in Bangladesh and contribute significantly
to GDP. Access to finance is often a challenge for SMEs, especially for those in rural areas, due
to strict collateral requirements and high interest rates from traditional banks. Bangladesh Bank
has introduced various refinance schemes, enabling SMEs to access loans at affordable rates.
These efforts have led to a rise in local businesses, providing employment opportunities and
stimulating economic activity within rural communities. Furthermore, the SME sector has been
instrumental in empowering women entrepreneurs, who now have greater access to finance
through targeted loans and microcredit schemes.

Together, agent banking and SMEs are reshaping Bangladesh’s financial landscape by making
financial services accessible to a broader population and encouraging economic inclusion. In
conclusion, the growth of agent banking and SMEs is essential for achieving comprehensive
financial inclusion in Bangladesh, helping to create a more equitable and inclusive economy.
Expanding these initiatives will further strengthen Bangladesh’s financial system, promoting
growth for all.
 Importance of CBDC on Financial Inclusion in Bangladesh

Financial inclusion is critical to economic growth, allowing people and businesses to access
essential financial services. In Bangladesh, the potential introduction of a Central Bank Digital
Currency (CBDC) could greatly enhance financial inclusion by making digital payments
accessible to the unbanked population. This essay discusses the impact CBDC could have on
financial inclusion in Bangladesh by providing a secure, low-cost, and efficient digital payment
option.

CBDC can bridge the gap for millions who remain unbanked, especially in rural areas where access
to physical banks is limited. By offering a government-backed digital currency, Bangladesh Bank
can provide citizens with a secure, digital form of money that can be easily stored on mobile phones
and accessed through digital wallets. This would allow people in remote areas to make digital
payments, save money, and access basic banking services without the need for a traditional bank
account. For example, a retail CBDC would enable individuals to receive government
disbursements directly, reducing dependency on cash and the logistical challenges associated with
cash distribution in rural areas.

Moreover, CBDC can lower transaction costs, making digital transactions more affordable.
Traditional banking fees can be prohibitive for low-income individuals, but CBDC would
eliminate intermediaries, potentially making transactions cheaper and encouraging usage among
the economically disadvantaged. For Bangladesh, where remittances make up a substantial portion
of the economy, a CBDC can facilitate cheaper and faster cross-border transactions, increasing
convenience for families relying on remittances from abroad. Additionally, a CBDC could foster
transparency, as all transactions would be traceable, thereby reducing money laundering and fraud,
which are common in cash-based economies.

Despite these benefits, implementing CBDC comes with challenges, such as the need for robust
digital infrastructure and public awareness. Overcoming these challenges would be essential to
ensure that CBDC achieves its intended goal of financial inclusion.

In conclusion, the introduction of a CBDC in Bangladesh could be a transformative step towards

financial inclusion, offering secure, accessible, and affordable financial services for all. By
embracing CBDC, Bangladesh has the potential to build a more inclusive financial system that
serves both rural and urban populations.
 Importance of Mobile Financial Services (MFS)
on Financial Inclusion in Bangladesh

Financial inclusion is essential for economic empowerment and poverty reduction, especially in
developing countries like Bangladesh. Mobile Financial Services (MFS) have become
instrumental in promoting financial inclusion by providing accessible and affordable banking
options for the unbanked population. This essay explores how MFS contributes to financial
inclusion in Bangladesh by offering convenient, secure, and widely accessible financial services.

MFS platforms, such as bKash, Nagad, and Rocket, enable users to access basic financial services
directly from their mobile phones. These services allow users to open accounts, send and receive
money, pay bills, and even access small loans without requiring a traditional bank account.
According to Bangladesh Bank, MFS adoption has grown substantially, with over 110 million
MFS accounts in Bangladesh by 2023. This widespread adoption is significant in a country where
bank branches are scarce in rural areas, making it difficult for residents to access financial services.
By using MFS, people in remote regions can now participate in the financial system, save money
securely, and make quick payments, which were once challenging and time-consuming.

Moreover, MFS has empowered marginalized groups, particularly women and low-income
individuals. Women in rural areas, who often have limited access to financial institutions, use MFS
to independently manage their finances and receive remittances directly. This financial
empowerment has contributed to women’s economic participation and social independence.
Additionally, MFS has streamlined the process of receiving government-to-person payments, such
as social safety net transfers and pandemic-related relief, ensuring that funds reach beneficiaries
quickly and transparently.

However, despite its advantages, MFS also faces challenges like digital fraud and the need for
greater financial literacy. Many new users are vulnerable to scams due to a lack of understanding
of digital security. Addressing these challenges requires efforts from both the government and
MFS providers to enhance digital literacy and implement stronger cybersecurity measures.

In conclusion, MFS has proven to be a crucial tool for promoting financial inclusion in
Bangladesh, reaching millions of unbanked individuals with convenient and secure financial
services. As the sector continues to grow, MFS can drive Bangladesh towards a more inclusive
economy, bridging financial gaps and promoting socioeconomic development.
 Prospects and Challenges of FinTech in Bangladesh

The financial technology (FinTech) sector has the potential to revolutionize Bangladesh’s banking
and financial landscape, making financial services more accessible, efficient, and inclusive.
FinTech innovations can drive economic growth by expanding financial inclusion, supporting
small businesses, and providing digital solutions to everyday financial needs. This essay explores
the prospects and challenges of FinTech in Bangladesh.

The prospects for FinTech in Bangladesh are substantial, particularly in promoting financial
inclusion. Digital payment solutions, such as mobile financial services (MFS) provided by bKash
and Nagad, have enabled millions of Bangladeshis, especially those in rural areas, to access
banking services without traditional bank accounts. The rapid adoption of MFS has demonstrated
the demand for digital financial solutions, which can further expand with innovations in peer-to-
peer lending, digital wallets, and blockchain-based payments. Additionally, FinTech solutions
such as crowdfunding platforms and online lending offer small and medium-sized enterprises
(SMEs) easier access to capital, supporting the growth of local businesses. Bangladesh’s young
and tech-savvy population further fuels the FinTech market, which is projected to grow
significantly in the coming years.

However, several challenges hinder the full potential of FinTech in Bangladesh. One of the major
issues is the lack of a comprehensive regulatory framework tailored to FinTech activities. Without
clear regulations, FinTech companies face uncertainties that may limit their growth and
innovation. Cybersecurity risks also pose a significant threat to the FinTech ecosystem, as digital
platforms become more vulnerable to cyber-attacks and financial fraud. According to Bangladesh
Computer Council, cybersecurity incidents have increased with the rise in digital transactions,
highlighting the need for robust digital security infrastructure. Moreover, limited digital literacy
among the population and a lack of adequate investment in FinTech startups make it difficult for
these solutions to reach their full potential.

To overcome these challenges, Bangladesh needs a supportive regulatory environment and greater
investment in digital infrastructure. Additionally, initiatives to enhance digital literacy and
cybersecurity standards will be critical to establishing a secure and trusted FinTech ecosystem.

In conclusion, while FinTech holds immense promise for transforming Bangladesh’s financial
sector, addressing the current challenges will be key to realizing its full potential. With the right
support, FinTech can drive financial inclusion, empower SMEs, and contribute to a more
dynamic and inclusive economy.
 Merger and Acquisition:
The Ultimate Choice for Inclusive Banking in Bangladesh

In Bangladesh’s evolving banking landscape, mergers and acquisitions (M&A) present a strategic
approach to enhancing financial inclusion and stabilizing the banking sector. As banks face
challenges such as non-performing loans (NPLs), high operational costs, and a need for capital
adequacy, M&A can be instrumental in creating stronger, more inclusive financial institutions.
This essay examines how M&A can support inclusive banking in Bangladesh by improving
stability, expanding financial access, and increasing efficiency.

Mergers and acquisitions can strengthen the banking sector by combining the resources and
capabilities of two or more institutions, creating a more resilient financial entity. For instance,
merging a smaller, rural-focused bank with a larger bank can expand the reach of financial services
to underserved areas, enhancing financial inclusion. Through M&A, banks can reduce operational
redundancies, optimize resources, and improve efficiency, ultimately reducing costs that can be
passed on to customers through lower fees or improved service quality. Such cost reductions and
resource sharing make it easier for banks to extend credit and other services to marginalized
communities, supporting inclusive economic growth.

Furthermore, M&A can address the issue of NPLs, which is a major challenge in Bangladesh’s
banking sector. By consolidating weaker banks with stronger ones, M&A can help spread the risk
and allow the newly formed institution to absorb financial shocks more effectively. This approach
can also enhance governance and transparency, as the consolidation process often requires rigorous
regulatory oversight and adherence to stricter corporate governance standards. For example, a
merged bank with a larger capital base can provide better credit access to small and medium-sized
enterprises (SMEs) in rural areas, which are crucial for economic development but often struggle
to access financing.

Despite its potential, M&A also comes with challenges, such as integration complexities and
cultural differences within merging entities. However, with proper planning and regulatory
support, these obstacles can be overcome, making M&A a viable strategy for strengthening and
expanding the banking sector.

In conclusion, mergers and acquisitions are a promising route to achieving inclusive banking in
Bangladesh, as they enable banks to strengthen their financial base and reach underserved
populations. Embracing M&A can lead to a more inclusive and resilient banking system,
providing greater opportunities for economic empowerment across the country.
 Cybersecurity: An Emerging Threat to the Advancement
of Bangladesh’s Banking Sector

The banking sector in Bangladesh has made significant strides in digital transformation, enhancing
financial accessibility and convenience for millions of customers. However, as digital banking
services grow, so does the threat of cyber-attacks, which pose serious risks to the stability and
security of the banking system. This essay examines the impact of cybersecurity threats on the
banking sector’s advancement, the challenges these threats present, and the need for robust
cybersecurity measures.

With the increase in mobile banking, online transactions, and other digital services, banks in
Bangladesh have become prime targets for cybercriminals. Cybersecurity incidents, including data
breaches, malware attacks, and phishing scams, have escalated in recent years. For example, the
2016 cyber heist on Bangladesh Bank, where hackers stole $81 million through the SWIFT system,
highlighted the vulnerabilities in the country’s financial infrastructure. This attack underscored the
urgent need for stronger cybersecurity defenses to protect against sophisticated cyber threats.
Moreover, the rise in mobile financial services (MFS) like bKash and Nagad has expanded digital
financial transactions, which, while beneficial, also increases the risk of online fraud.

One of the major challenges in addressing cybersecurity threats is the lack of adequate
infrastructure and cybersecurity expertise within many banks. Smaller banks, in particular, often
struggle with limited budgets for cybersecurity measures, making them more susceptible to
attacks. Additionally, there is a shortage of skilled cybersecurity professionals in Bangladesh,
which limits the sector’s capacity to detect, respond to, and mitigate cyber incidents. The lack of
awareness among customers also contributes to the problem, as many users are unfamiliar with
digital security practices and fall victim to phishing and social engineering scams.

To mitigate these risks, Bangladesh’s banking sector needs to prioritize cybersecurity at both the
institutional and regulatory levels. Bangladesh Bank, as the regulator, can play a key role by
enforcing stringent cybersecurity regulations and offering cybersecurity training to financial
institutions. Banks should invest in advanced security technologies, such as multi-factor
authentication and real-time monitoring systems, to protect their digital infrastructure.
Additionally, educating customers on secure online practices is essential to reduce the risk of cyber
fraud.

In conclusion, cybersecurity has become a critical concern for the advancement of Bangladesh’s
banking sector as digital banking grows. By addressing these challenges with proactive
measures, the sector can ensure a secure digital environment, fostering trust and promoting
sustainable digital transformation for the future.
 How Bangladesh's Banking Sector Can Mitigate the Liquidity Crisis

The banking sector in Bangladesh plays a crucial role in supporting economic growth by
facilitating access to credit, supporting businesses, and driving investments. However, in recent
years, the sector has faced significant liquidity challenges due to factors like high non-performing
loans (NPLs), declining foreign exchange reserves, and a mismatch between deposits and loans.
This essay discusses strategies to mitigate the liquidity crisis in Bangladesh’s banking sector,
focusing on improving asset quality, attracting foreign investments, and enhancing regulatory
measures.

One primary step to address the liquidity crisis is to reduce the level of NPLs, which currently
stand at over 9% of total loans. High NPLs constrain banks’ lending capacity by tying up funds
that could otherwise be available for new loans. To manage this issue, banks can adopt stricter
lending criteria and improve credit assessment processes, ensuring loans are extended to
creditworthy borrowers. Additionally, Bangladesh Bank can play a role by enforcing recovery
measures and incentivizing banks to reduce NPLs. For instance, implementing Alternative Dispute
Resolution (ADR) mechanisms for resolving loan disputes could expedite recovery processes and
improve liquidity.

Another effective measure is to increase foreign investment and remittance inflows, which help
boost foreign exchange reserves and provide banks with additional liquidity. Bangladesh Bank can
encourage this by allowing greater flexibility in remittance processing and offering incentives for
foreign direct investments (FDI). Initiatives such as premium bonds for non-resident Bangladeshis
(NRBs) and simplified remittance channels can help attract foreign capital, which will support
liquidity. Additionally, promoting export diversification would help maintain a steady flow of
foreign earnings, stabilizing reserves and reducing pressure on local currency liquidity.

Enhancing interbank lending mechanisms and expanding access to the Bangladesh Bank’s
refinancing facilities are also key steps to improve liquidity. By expanding Assured Liquidity
Support (ALS) and reducing the cost of borrowing through the repo market, the central bank can
ensure that banks have access to emergency funds when needed. These measures can help balance
liquidity across banks, reducing the risk of liquidity crunches in smaller institutions.

In conclusion, addressing the liquidity crisis in Bangladesh’s banking sector requires a

comprehensive approach focused on reducing NPLs, attracting foreign investments, and ensuring
effective regulatory oversight. By implementing these measures, Bangladesh’s banking sector
can overcome current challenges and create a more resilient and robust financial environment for
sustainable growth.
 How Bangladesh's Banking Sector Can Recover the Trust of the Public

The banking sector in Bangladesh has long been crucial to the country's economic growth, yet over
the years, it has suffered from a decline in public trust. Financial scandals, poor governance, and
inadequate regulatory measures have eroded the confidence of both individuals and businesses in
banks. In order to regain the trust of the public, the sector must address key issues like
transparency, accountability, and the digitization of banking services.

The first and most urgent step toward restoring trust is ensuring transparency in banking
operations. In recent years, several high-profile corruption cases and loan defaults have marred the
image of the banking sector. For instance, the defaulted loans in Bangladesh's banking system
reached around 1.1 trillion Taka by 2021, with many of them concentrated in state-owned banks.
To regain public trust, banks need to adopt clear reporting practices, disclose the risks associated
with lending, and implement strong internal controls. By making information more accessible and
understandable to the public, banks can build credibility.

Another key area is accountability in management and governance. Weaknesses in governance

have been a major contributor to the lack of public confidence. The involvement of politically
connected individuals in managing banks has often resulted in poor decision-making and
embezzlement. To rebuild trust, the government should strengthen the regulatory framework,
ensuring that banks operate with greater scrutiny. Independent audits and external oversight can
help ensure that banks are acting in the best interests of their clients. The Bangladesh Bank's recent
efforts to reduce corruption and improve oversight are steps in the right direction, but further
institutional reforms are necessary.

Finally, embracing digital banking can be an effective way to restore public trust. The rapid rise
of mobile banking platforms such as bKash has demonstrated the potential for digital services to
increase accessibility and reliability. By enhancing digital infrastructure, offering more secure
online banking options, and improving customer service, banks can appeal to a younger, tech-
savvy generation that values convenience and security. For instance, the introduction of e-KYC
(electronic Know Your Customer) and biometric verification could reduce fraud and identity theft,
boosting public confidence.

In conclusion, the recovery of public trust in Bangladesh's banking sector hinges on addressing
the core issues of transparency, accountability, and digitization. With effective reforms, there is
hope that the sector will regain the trust of its customers and play a pivotal role in the country's
economic development.
 Non-Performing Loan: How to Reduce?

Non-performing loans (NPLs) have become a persistent challenge in Bangladesh’s banking sector,
undermining financial stability and hindering the growth potential of the economy. NPLs are loans
where borrowers are unable to meet their repayment obligations for more than 90 days, leading to
losses for financial institutions. To reduce NPLs, banks need to focus on improving lending
practices, enhancing loan recovery mechanisms, and strengthening regulatory oversight.

A primary step in reducing NPLs is improving the quality of loan origination. Banks in Bangladesh
have often been criticized for lax lending standards and political interference in loan approvals. A
significant portion of NPLs stems from loans granted to large businesses with weak repayment
capacity or to politically-connected borrowers who default without consequence. To tackle this,
banks must implement more stringent credit risk assessments and prioritize businesses with solid
financial histories. Utilizing advanced data analytics and risk management tools can also help in
assessing borrowers' repayment capabilities more effectively, reducing the likelihood of defaults.

Secondly, enhancing loan recovery mechanisms is essential. Bangladesh’s banking system lacks a
robust and efficient mechanism for recovering defaulted loans. As of 2021, NPLs accounted for
more than 9% of total loans in the banking sector, a figure higher than the global average. To
address this, banks should establish dedicated loan recovery units that specialize in negotiating
with defaulters and facilitating restructuring options. Additionally, the introduction of specialized
courts for handling financial disputes can expedite the resolution of loan defaults and improve
recovery rates. Bangladesh Bank has already made strides in this area, with its establishment of
the Financial Institutions Division to oversee loan recovery processes more effectively.

Finally, strengthening regulatory oversight and promoting transparency will play a key role in
reducing NPLs. Bangladesh Bank must continue to enforce stringent lending regulations and
ensure banks adhere to proper reporting standards. Regular audits and independent assessments
can also prevent banks from hiding or underreporting NPL figures, ensuring a more accurate
picture of the sector’s financial health.

In conclusion, reducing NPLs in Bangladesh’s banking sector requires a multi-faceted approach,

including stricter lending standards, improved recovery mechanisms, and stronger regulatory
oversight. If implemented effectively, these strategies can help lower the NPL ratio, leading to a
more resilient and trustworthy banking sector.
 An Independent Monetary Policy: The Pathway of Financial Advancement
Bangladesh's banking and financial system has made remarkable progress over the past few
decades, but its economic growth is often influenced by external factors, particularly political
pressures and fiscal policies. An independent monetary policy is essential to address these
challenges and ensure that the central bank can make decisions based on the broader economic
needs rather than short-term political interests. This essay argues that an independent monetary
policy will pave the way for financial advancement in Bangladesh by enhancing inflation control,
ensuring currency stability, and fostering sustainable economic growth.

One of the primary benefits of an independent monetary policy is its ability to manage inflation
effectively. In recent years, Bangladesh has faced inflationary pressures, primarily driven by rising
food prices, exchange rate volatility, and global commodity price fluctuations. When the central
bank operates independently, it can set interest rates and adopt policies that target inflation control
without political interference. For instance, in 2020, inflation in Bangladesh averaged around
5.5%, and by setting a clear monetary policy focused on price stability, the Bangladesh Bank can
target inflation levels that contribute to both economic stability and consumer confidence.

Moreover, an independent monetary policy helps maintain the stability of the national currency,
the Taka. Exchange rate fluctuations can harm importers and exporters, disrupt business planning,
and lead to capital flight. If the central bank has the autonomy to make decisions without external
pressures, it can more effectively manage foreign reserves, intervene in the currency market, and
adjust interest rates to stabilize the Taka. For example, during periods of external shocks, such as
the COVID-19 pandemic, an autonomous central bank would be better positioned to use monetary
tools like liquidity injections or adjustments in reserve requirements to mitigate negative impacts
on the currency.

Lastly, an independent monetary policy fosters long-term economic growth by creating a

predictable environment for investment. When businesses and foreign investors see that monetary
decisions are made based on sound economic reasoning rather than political influence, they are
more likely to commit capital to Bangladesh. The stability in prices and the currency will
encourage investment in key sectors, driving productivity and job creation.

In conclusion, an independent monetary policy is crucial for Bangladesh's financial

advancement, as it allows for better inflation management, currency stability, and long-term
economic growth. With the right policy framework, Bangladesh can create a resilient economy
that withstands both domestic and global challenges, ensuring a prosperous future for its people.
 Importance of Boosting FX Reserve
Foreign exchange (FX) reserves play a pivotal role in the economic stability and financial health
of any nation, including Bangladesh. In recent years, Bangladesh has faced challenges related to
its FX reserves, particularly during periods of global economic uncertainty and domestic trade
imbalances. This essay explores the importance of boosting Bangladesh’s FX reserves,
highlighting the need for financial security, currency stability, and support for economic growth.

One of the primary reasons for boosting FX reserves is to ensure financial security and protect
against external shocks. FX reserves act as a buffer that helps a country manage sudden
disruptions, such as price volatility in key imports or a sudden outflow of capital. For instance,
Bangladesh’s FX reserves hit a record high of around $48 billion in 2021, providing the country
with a much-needed cushion during the global COVID-19 crisis. With adequate reserves, the
government can import essential goods, pay external debts, and stabilize the economy even in
times of international financial instability.

Moreover, increasing FX reserves is essential for maintaining currency stability, particularly the
exchange rate of the Bangladeshi Taka. A stable currency is crucial for protecting the purchasing
power of the population and fostering a favorable environment for investment. Inadequate reserves
can lead to depreciation of the national currency, resulting in inflation and higher costs for
consumers. By maintaining a strong FX reserve, Bangladesh can better defend the Taka against
speculative attacks and fluctuations in global markets. This would not only stabilize the domestic
economy but also make the country more attractive to foreign investors.

Additionally, a healthy level of FX reserves helps Bangladesh meet its foreign debt obligations
and enhance its creditworthiness in the international markets. International credit rating agencies
often assess a country’s ability to manage its debt based on its FX reserves. A higher reserve
position boosts investor confidence, lowering borrowing costs and improving the country's credit
ratings. This, in turn, supports long-term economic development by facilitating access to global
capital markets.

In conclusion, boosting Bangladesh’s FX reserves is crucial for securing financial stability,

protecting the Taka, and enhancing the country’s global economic standing. By strengthening
reserves, Bangladesh can ensure a more resilient economy, capable of handling external pressures
and continuing its path of growth and development.
Bancassurance in Bangladesh: Renewed Version of Risk Mitigation Tool
=======================================================

In Bangladesh, Bancassurance has emerged as a renewed version of the traditional risk

mitigation tool, offering a symbiotic relationship between banks and insurance companies. This
innovative model integrates banking and insurance services under one roof, presenting a host of
advantages for both financial sectors and their clientele. This article will explore the customer
convenience, benefits for banks and insurance companies, and the role in promoting financial
inclusion that Bancassurance holds in Bangladesh.

Firstly, Bancassurance provides customers with a convenient one-stop solution for their
financial needs. With banking and insurance services available in the same institution, clients can
easily access a wide array of products, from savings accounts to life insurance policies. This
streamlining of services not only saves time but also simplifies the often-complex process of
managing multiple financial products.

Furthermore, Bancassurance offers banks an avenue for diversification and additional

revenue streams. By partnering with insurance companies, banks can expand their portfolio of
offerings without the need for significant infrastructure changes. This diversification strengthens
the resilience of financial institutions, reducing their vulnerability to market fluctuations and
economic downturns.

For insurance companies, Bancassurance opens up a vast distribution network, tapping into
the extensive customer base of banks. This strategic alliance allows insurers to reach a larger
audience, especially in regions where insurance penetration may be low. Additionally, insurers
benefit from reduced distribution costs, as they leverage the existing branch network of partner
banks.

Importantly, Bancassurance plays a pivotal role in promoting financial inclusion in

Bangladesh. By making insurance products more accessible to the general population, especially
in rural areas, this model contributes to a more resilient and financially literate society.

In conclusion, Bancassurance in Bangladesh represents a dynamic evolution of risk

mitigation tools, bringing together the strengths of banking and insurance sectors for the benefit
of customers and financial institutions alike. Its role in fostering convenience, diversification, and
financial inclusion underscores its significance in the country's evolving financial landscape.
 Title: Building a Smart Bangladesh: The Vital Role of the Banking Industry
=========================================================

In the pursuit of creating a Smart Bangladesh, the banking industry stands as a pivotal
player, wielding immense importance in shaping the nation's economic landscape. As the
backbone of any modern economy, banks serve as the custodians of financial resources, facilitating
growth, innovation, and progress. This essay will delve into how banks contribute to the
advancement of economic growth and development, the promotion of financial inclusion, the
evolution of digital transformation, and the progress of technological advancements to foster the
development of a smart Bangladesh.

Firstly, the banking sector acts as a catalyst for economic development by providing the
necessary financial infrastructure for businesses to thrive. Through offering a range of services
such as loans, investment opportunities, and financial advice, banks empower entrepreneurs and
small businesses to establish and expand, ultimately driving economic growth.

Moreover, in the era of digital transformation, the banking industry plays a central role in
fostering technological advancement. By embracing and implementing cutting-edge technologies
such as online banking, mobile payment systems, and digital wallets, banks contribute significantly
to the vision of a Smart Bangladesh. These innovations not only enhance convenience for
customers but also promote financial inclusion by reaching remote and underserved communities.

Additionally, the banking sector serves as a platform for fostering innovation and
entrepreneurship. By providing funding for research and development, as well as venture capital
for startups, banks fuel the engines of innovation. This, in turn, contributes to the creation of new
industries, job opportunities, and a culture of forward-thinking progress.

Furthermore, the banking industry plays a vital role in promoting financial literacy and
education. Through workshops, seminars, and educational programs, banks empower individuals
with the knowledge and skills to make informed financial decisions. This leads to a financially
savvy population that can actively participate in the nation's economic growth.

In conclusion, the importance of the banking industry in building a Smart Bangladesh

cannot be overstated. From fueling economic growth to embracing technological innovations and
promoting financial literacy, banks serve as the cornerstone of a prosperous and forward-looking
nation. As Bangladesh strides towards a smarter future, the banking sector stands ready to drive
and support this transformative journey.
 Digital Banking of Bangladesh: A New Era of Financial System
Digital Banking refers to the use of technology to offer banking services, allowing customers to
conduct transactions electronically without the need for physical branches. In Bangladesh, the rise
of digital banking represents a significant shift towards a more efficient and accessible financial
system. This essay will delve into how digital banking is boosting financial inclusion in
Bangladesh, the challenges it faces, particularly concerning money laundering, and the remedies
to address these issues.

Digital banking has opened up new avenues for financial inclusion in Bangladesh. With the
country aiming for a mostly cashless society by 2041, the proliferation of digital banks is vital in
reaching this goal. These banks offer efficient and low-cost financial services, particularly
benefiting underserved populations such as rural communities and small businesses.

However, along with its benefits, digital banking also brings challenges, especially concerning
money laundering and financial crimes. The anonymity and speed of digital transactions can be
exploited by criminals to launder illicit funds. To combat this, Bangladesh needs robust anti-money
laundering (AML) measures, such as stringent customer verification processes and transaction
monitoring systems.

Moreover, educating both customers and bank staff about money laundering risks and AML
compliance is crucial. Regular training enhances awareness, ensuring everyone in digital banking
understands their role in preventing financial crimes. Furthermore, AI technologies can boost anti-
money laundering efforts by analyzing transaction data for suspicious activities, significantly
improving effectiveness in the digital banking sector.

Digital banking in Bangladesh offers enhanced accessibility and efficiency, particularly benefiting
marginalized communities and small businesses. To maximize its potential, the country must
tackle challenges like money laundering through strong AML measures and technological
innovations, ensuring a secure and trustworthy financial system that supports economic growth.
(279 Words)
 SMART Rate of Interest: A New Hope to Combat Against Inflation
The Six-Month Moving Average Rate of Treasury Bill (SMART) Rate of Interest is a benchmark
introduced by the Bangladesh Bank to stabilize interest rates. It plays a crucial role in guiding
financial products and fostering economic stability. This essay will explore how the SMART Rate
of Interest helps combat inflation, discuss whether it is sufficient on its own, and present challenges
along with recommendations for its effective implementation.

The SMART Rate of Interest serves as a crucial tool in Bangladesh's efforts to combat inflation.
By providing a stable benchmark for interest rates, it helps create predictability in borrowing and
lending. This stability encourages investment and savings, crucial components for economic
growth.

However, while the SMART Rate of Interest is a positive step, it may not be sufficient on its own
to fully address inflationary pressures. Additional measures, such as implementing a crawling peg
exchange rate system, could complement the SMART Rate's efforts. This system could stabilize
the value of the currency, particularly important for import-dependent economies like Bangladesh.

Challenges also exist in the effective implementation of the SMART Rate of Interest. Ensuring
that financial institutions adhere to the set rates and that the rate reflects the true economic
conditions are important considerations. Moreover, educating the public about the benefits of the
SMART Rate and how it affects their financial decisions is crucial for its success.

In conclusion, the SMART Rate of Interest is a valuable tool for stabilizing interest rates in
Bangladesh, aiding in economic stability. To enhance its effectiveness in fighting inflation, it
should be integrated with complementary measures like a crawling peg exchange rate system and
bolstered by addressing implementation challenges and raising public awareness. (277 Words)
 Impact of Merger & Acquisition (M&A) of Banking Sector of Bangladesh

Merger and acquisition (M&A) refer to the strategic processes through which companies consolidate assets
or combine operations, often to achieve synergies and enhance competitive advantages. Recently, the Exim
Bank Ltd acquired Padma Bank Ltd, illustrating the ongoing significance of M&A activities in shaping the
landscape of industries countrywide. This essay aims to assess the merit of the decision and its impact on
the banking sector, considering potential challenges and offering recommendations.

The decision to merge weak banks with stronger ones holds several merits and potential benefits for the
banking sector in Bangladesh. Firstly, it enhances financial stability by reducing the risk of bank failures,
thereby bolstering depositor confidence, and averting systemic financial crises. Secondly, such mergers can
lead to greater efficiency and cost reduction through economies of scale and scope, benefiting customers
with potentially lower costs. Additionally, merging with stronger banks provides access to enhanced risk
management practices, improved capital and liquidity, broader service offerings, regulatory compliance,
and job preservation. These advantages can contribute to a more stable, efficient, and resilient banking
system, benefiting both customers and the broader economy. For instance, the Reserve Bank of India
oversaw the successful acquisition of six weak Indian banks by four stronger ones, demonstrating the
positive outcomes of such mergers.

However, this strategy is not without challenges. In the context of Bangladesh, the acquisition of Padma
Bank Ltd by EXIM Bank Ltd presents several challenges. Firstly, cultural integration poses a hurdle, given
the differing organizational ethos between a conventional bank like Padma and an Islamic bank like EXIM.
Secondly, navigating regulatory complexities becomes crucial, especially in merging two distinct banking
models under Bangladesh's banking regulations. Thirdly, technological integration is key, as aligning
disparate IT systems between conventional and Islamic banking practices requires seamless execution to
maintain service quality for customers. These challenges emphasize the need for meticulous planning and
strategic implementation to ensure a successful merger between Padma Bank Ltd and EXIM Bank Ltd.

To address the aforementioned challenges, several policies can be recommended. Firstly, facilitate cultural
integration through open communication, cross-cultural training, and joint collaborative initiatives.
Secondly, ensure regulatory compliance by appointing a dedicated team, closely monitoring regulatory
changes, and making necessary adjustments. Thirdly, streamline technological integration with a thorough
IT assessment, a detailed integration plan, and comprehensive employee training on new systems and
processes. These measures will aid in a successful merger, fostering a unified and efficient banking entity.

In conclusion, the acquisition of Padma Bank Ltd by EXIM Bank Ltd in Bangladesh highlights the
significance of mergers in the banking sector for improved efficiency and resilience. This essay has
explored the challenges of cultural, regulatory, and technological integration, offering recommendations
and policy suggestions to ensure the success of this strategic merger.
 Promoting Good Governance in Bangladesh's Banking Sector
The banking sector serves as a cornerstone of Bangladesh's economy, facilitating financial
intermediation, investment, and economic growth. Ensuring good governance within this sector is
paramount to maintain stability, trust, and transparency. Over the years, Bangladesh has taken
significant strides towards fostering good governance practices in its banking industry. This essay
aims to discuss the importance of promoting good governance in the banking sector of BD,
considering potential challenges, and offering recommendations.

Transparency and accountability are central tenets of good governance in the banking sector.
Bangladesh Bank, the country's central bank, plays a pivotal role in setting regulatory frameworks
and monitoring compliance. Introduction of robust regulations, such as Basel III norms, has
strengthened risk management practices, ensuring banks operate with prudence. Moreover, regular
audits and inspections help to identify potential risks and prevent malpractices.

Efforts towards digitalization have also improved transparency and efficiency in banking
operations. Online banking services, electronic fund transfers, and digital payment systems have
reduced manual interventions and enhanced customer convenience. This shift towards digital
platforms has minimized the scope for corruption and inefficiencies.

However, challenges persist in achieving optimal governance standards. Instances of non-

performing loans (NPLs) remain a concern, affecting the stability and health of banks. Ensuring
proper credit risk assessment, recovery mechanisms, and loan monitoring is crucial to mitigate this
risk. Moreover, corporate governance practices, such as board independence and effective risk
oversight, need continual reinforcement.

To further promote good governance in the banking sector, several recommendations can be
considered. Strengthening regulatory oversight with stricter enforcement of regulations and
penalties for non-compliance can deter malpractices. Implementing comprehensive risk
management frameworks tailored to the unique challenges of the sector can mitigate financial
vulnerabilities. Additionally, enhancing financial literacy among consumers and promoting
whistleblower protection mechanisms can encourage transparency and accountability at all levels.

In conclusion, good governance in Bangladesh's banking sector is pivotal for fostering a stable and
resilient financial system. Continued efforts towards transparency, accountability, and risk
management will not only safeguard the interests of stakeholders but also contribute to the
sustainable growth and development of the economy.