Without a sound financial system it is quite difficult and expensive to allocate resource and shift risks to its lowest level (low economic development). Financial system plays an important role in the economic development and it is divided into financial markets and institutions. The role of the financial system is to gather or pool money from people and businesses that have more than they need currently and transmit those funds to those who can use them for either consumption or investment. A healthy economy is dependent on efficient transfers of resources from people who are net savers (surplus) to firms and individuals who need capital. Without efficient transfers, the economy simply could not function. Obviously, the level of employment and productivity, hence our standard of living, would be much lower. Therefore, it is absolutely essential that our financial market functions efficiently, not only quickly, but also at a minimal cost. The financial system in Bangladesh includes Bangladesh Bank (the Central Bank), scheduled banks, non-bank financial institutions, microfinance institutions (MFIs), insurance companies, co-operative banks, credit rating agencies and stock exchange. Among scheduled banks there are 4 nationalized commercial banks (NCBs), 5 state-owned specialized banks (SBs), 30domestic private commercial banks (PCBs), 9 foreign commercial banks (FCBs) and 29 nonbank financial institutions (NBFIs) as of December 2006. However, Rupali Bank,an NCB is being sold to a foreign buyer, and once this transaction is completed, the country will have only 3 NCBs, which are being corporatized. Over and above the institutions cited above, three development financial institutions namely House Building Finance Corporation (HBFC), Ansar- VDP Unnayan Bank and Karma Shangsthan Bank are operating in Bangladesh, all of which are state owned. Introduction:
Financial system is a system which tones up the savings-investment process of a country. Financial system plays a significant role in the economic development of a country. The importance of an efficient financial sector lies in the fact that, it ensures domestic resources mobilization, generation of savings, and investments in productive sectors. In fact, it is the system by which a country’s most profitable and efficient projects are systematically and continuously directed to the most productive sources of future growth. The financial system not only transfers funds from savers to investors, it also selects projects which will yield the highest returns, accumulates sufficient quantities of capital to fund the range of investment projects across economic activities, accounts for price risks across assets, monitor performance, and enforce contracts. According to the McKinnon- Shaw hypothesis (1973), the conventional wisdom is that flexibility and efficiency of the financial system are crucial to the growth and development of a market economy. A comprehensive study by King and Levine (1993) from across 119 developed and developing countries over the 1960-1989 period provides compelling evidence that economic growth is dramatically dependent on the size of financial sector, credit to private sector and enterprises and interest rates. The larger the financial sector in the context of the overall economy, the greater the share of lending by depository rather than central banks, and the greater the share of credit to private sector rather than public sector, the greater is the rate of economic growth.
Major Components of a Financial System and their roles:
The financial sector in Bangladesh basically comprises the money and capital markets, insurance and pensions, and microfinance. In addition to the Bangladesh Bank (The Central Bank), there are 4 state-owned commercial banks (SCBs), 5 state-owned specialized banks, 30 domestic private commercial banks (PCBs), 9 foreign commercial banks, and 29 nonbank financial institutions (NBFIs) as of 2008. Figure 1 depicts...