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Wednesday, August 24, 2011

Necessity of New Banks

Here is the latest news on the development of government's steps to give permission for opening up more banks and financial institutions as published in today Prothom Alo.

Here is the link. 

It is already a news that neither Bangladesh Bank nor the Finance Ministry has agreed to give such permission. However, the finance minister already told journalists that he is in political pressure to do so and it would be a political decision rather economic decision if the permission is realized.

Report on the reaction of Bangladesh Bank
Report on the reaction of the Finance Minister

Without being a skeptical on the political motives, I am raising questions on the necessity of new banks in the current financial system of Bangladesh.  First, why the authority considers the necessity of news banks in the existing financial system (scope, both micro and macro)? Second, what will be the impact on money supply and the resulting implication on demand when the central bank has been struggling to control the growth of money supply? Third, is our regulatory authority is equipped enough to control such a big banking sector when we have seen recently that the central bank completely failed to control banks from their aggressive involvement in the stock market? Fourth, did we gauge the long-term implications of having a politically motivated financial system when we have the experience of high NPLs in the past and also of so much directed lending (even in the current financial system such as aggressive credit to the agriculture and SME sectors? I will rather put here a para (para 3, page 9) for your consideration from Fault Lines by Raghuram Rajan:

"This is not, of course, the first time in history when credit expansion has been used to assuage the concerns of a group that is being left behind, nor will it be the last. In fact, one does not even need to look outside the United States for examples. The deregulation and rapid expansion of banking in the United States in the early years of the twentieth century was in many ways a response to the Populist movement, backed by small and medium-sized farmers who found themselves falling behind the growing numbers of industrial workers and demanded easier credit. Excessive rural credit was one of the important causes of bank failure during the Great Depression"

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