Banking sector in Bangladesh is undergoing a challenging phase due to a liquidity shortage, following a massive capital outflow that resulted in a stock market crash early last year and restricted the banking sector’s ability to finance large projects, according to a report of gulfnews.com, a web portal.

Some 77 banks and financial institutions serve the country’s financial sectors comprising four state-owned commercial banks, 30 commercial banks, nine foreign commercial banks, five specialised commercial banks and 29 non-banking financial institutions.

Most banks that had significant exposure to the stock market have been suffering from a liquidity crisis since January 2011 following the market crash. However, despite this, the government has issued permits to open nine new banks, three of which are to be set up by non-resident Bangladeshis (NRBs) — a sign of the growing importance of Bangladeshi expatriate wage earners.

“The banking sector will undergo a tough time for some time as the sector is witnessing a liquidity shortage. With the issuance of the nine new banking licences, the country might become ‘overbanked’,” Mahmoud Hussain, President and Managing Director of Bank Asia, told the Gulf News.

“Besides, the government’s excessive domestic borrowing has added pressure on us.”
Despite these factors, Bangladesh is steadily moving towards a higher growth path, said the International Monetary Fund (IMF).

“It has achieved an average annual growth rate of 6.2 per cent over the last five years; in particular — a growth rate of 6.1 and 6.7 per cent during FY10 [fiscal year] and FY11 respectively, despite the global economic slowdown [Bangladesh follows a July to June fiscal],” Arvind Virmani, IMF executive director for Bangladesh, said.

Hussain said every year banks collectively open about 200 branches across the country as more and more people are being brought into the banking service network. “As a result, the bankers’ mobility has gone up. However, due to the challenging factors, risks have gone up.”

Rapid growth in the banking sector and equity markets has strained supervisory capacity and heightened systemic risks, said a recent report by the IMF. The Bangladesh government recognises the importance of strengthening the financial sector to reduce risks and support growth, the IMF said.

“However, macroeconomic pressures have emerged since the last fiscal year. Inflation has been in double digits and fiscal pressure has escalated, mainly due to increased subsidy costs as global oil prices have sharply risen,” Virmani said.

Hussain said despite these challenges banks will continue to grow, although a careful approach is needed.

The Independent/ Bangladesh/ 29-May-2012