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Creating a more efficient financial system : challenges for Bangladesh, Volume 1
 
Author:Beck, Thorsten; Rahman, Md. Habibur; Country:Bangladesh;
Date Stored:2006/06/07Document Date:2006/06/01
Document Type:Policy Research Working PaperSubTopics:Economic Theory & Research; Banks & Banking Reform; Corporate Law; Investment and Investment Climate; Financial Intermediation
Language:EnglishRegion:South Asia
Report Number:WPS3938Collection Title:Policy, Research working paper ; no. WPS 3938
Volume No:1  

Summary: While Bangladesh has embarked on a path to reform its financial system, most prominently by privatizing its government-owned banks, the Nationalized Commercial Banks (NCBs), a sustainable long-term expansion of the financial system requires a more substantial change in the role of government. Using recent research and international comparisons, this paper argues that the government should move from its role as an operator and arbiter in the financial system to a facilitator role. This implies not only divestment from government-owned banks, but also de-politicization of the licensing process and a market-based bank failure resolution framework that focuses on intermediation and not on the rescue of individual institutions. Most important, the government should move away from the implicit guarantee for depositors and owners to applying the existing limited explicit deposit insurance for depositors, while simultaneously relying more on market participants to monitor and discipline banks instead of micro-managing financial institutions. This redefinition of government's role should not be limited to the banking system, but applies to other segments of the financial system, such as capital markets and the micro-finance sector, and should be seen as an essential element in the governance reform agenda and in the movement from a relationship-based economy to a market and arms-length economy.

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