Global Banking Meltdown: Did Bangladesh receive the Aladdin's Lamp?

During times of economic downturn, it’s not uncommon for banks to face financial difficulties and even collapse. But, when US Banks collapse, the whole world goes through a financial crisis. However, it seems like a miracle is happening on the other side of the world. In one part of the world, where the banking industry of a developed economy, the US, is going through a difficult period, the banking sector of a small developing country Bangladesh is performing well. Has Bangladesh got its hand on the magical lamp of Aladdin? How is the economy sustaining well in the economic downturn, despite bank failures in the US is a mystery which needs to be solved.

In the last decade, Bangladesh’s economy has become one of the economies that is expanding the quickest. On one side, where the nation’s physical and strategic interest has grown, on the other side the nation has demonstrated its crucial capacity to create and enforce policies. This must have been the reason why; the developed countries are investing in Bangladesh. Starting from Japan, China, USA to even developing countries are interested to increase trade with the country. The country has been so engaged heavily in international trading that any international downfall could have affected the country severely. However, it seems like Bangladesh has developed the strength and strategies to deal with uncertainties. The country has been taking precautionary measures before any disaster could affect its economy: one of such steps examples is taking IMF’s stabilization package beforehand. Had the country waited for a long time, it would have to pay a higher cost. Because of the timeliness of the policy makers, Bangladesh was able to take IMF loan at only 2.2% whereas Pakistan will have to pay 19% for IMF loan. Even after agreeing on such a high cost, IMF has yet not guaranteed loan to Pakistan. It proves, how a small country like Bangladesh, has made its economy robust.

The country knows its weaknesses and this has been proved to be the strongest ability of the country. In 2014, where other countries were supporting crypto currencies, Bangladesh strictly banned trading of such currencies. After 9 years, one of the reasons behind US bank fails was ignoring the high risk arising from the crypto industry. It seems like Bangladesh was able to foresee the risk and potential collapse and took policy beforehand to limit the risk.

As a risk optimization tool, entities often use the principle of diversification. the central bank of the country, Bangladesh bank strictly monitors the activities of commercial banks in this aspect. It ensures banks have invested in a portfolio and has not centralized its deposits by giving loan to only one or two specific sectors. Then again, the banking structure of the country is not unitary. Almost all the banks of the country have branches to effectively meet extended liquidity needs in case of bank run.

Additionally, sudden rise in the market interest rate as a tool for dealing with high inflation has a lot to do with US bank failure. However, Bangladesh Bank did a commendable job in raising policy rate gradually in accordance with the needs of managing inflation, and giving “breathing space” for the banks since they did not have to face a shock of interest rates fluctuations.

Even though, often a group of economists suggest that Bangladesh should promote the market-based liquidation like US, Bangladesh has not accepted that proposal yet. As, the reason of difficulties in Bangladesh mostly arises from lack of corporate governance, the country, instead of promoting market-based liquidation, is taking every measure to improve the governance systems especially for the banking sector. On top of that, to safeguard depositors, the country has also insured depositors up to BDT 2 lakh deposits to build trust in the industry.

Another reason, often ignored by policy makers is the informal economy. For Bangladesh, the informal economy has proved to be a solution to economic development. It is a significant part of the budget and acting an important part in job formation, production, and salary enhancement in the country. Even, researches have proved that in terms of GDP and employment, Bangladesh’s informal sectors are the most important economic activities. According to studies, about 35% to 88% of Bangladesh’s workforce is employed in the informal economy, and the informal economy contributes around 49% to 64% of the country’s GDP. Among all of the sectors, the agricultural sector is the country’s largest informal sector.

Even though, it seems like Bangladesh has immune its economy from a banking collapse, it should not be undermined Rumour as it Rumours can lead to “bank runs”. So, the policy makers and the banking sector regulators of Bangladesh should focus more on building credible and efficient public relationship, especially on the social media platforms where the absence of formal channels create a vacuum and hence disinformation misguide the depositors, then to alter any ill-motived rumours that might create a panic among the general depositors.—Mordern Diplomacy.