Bangladesh Financial Sector. Syed Ali-Mumtaz H. Shah

a comprehensive plan to switch to the new international standard framework for assessing the capital adequacy of banks under Basel II,⁶ which the government is implementing since early 2009. It established a settlement system for secondary bond trading in May 2005 and introduced mark-to-market⁷ valuation guidelines for treasury securities effective from February 2006, which have improved operations of the interbank and treasury bill markets. It also introduced market-based auctions of treasury bills in September 2006 to bring greater flexibility to liquidity management.

      To reinforce the government’s financial sector reform program, the World Bank’s Financial Institutions Development Project⁸ was formally launched in February 2000. The project, which concluded in February 2006 and was administered by the Bangladesh Bank, made substantial progress towards sustainable financing of private sector initiatives to accelerate industrial growth in the country. The project’s resource mobilization component simplified market regulations to facilitate bond and security issues and created and developed market-oriented mechanisms. Rules and procedures for bonds and debentures were developed and implemented. The marketing of government treasury bonds was also strengthened. Both the Bangladesh Bank and the SEC received training on debt instruments, and reforms were implemented in the government’s National Saving Schemes.⁹ Furthermore, procedures for a secondary treasury bond and bill market were also developed. Under the Financial Institutions Development Project’s Strengthen Financial Institutions component, the Credit, Bridge and Standby Facility (CBSF) was created to encourage the development of term financing through a more efficient financial system. The CBSF provided funding from the International Development Association to financial institutions through a variety of mechanisms to increase their funding while enabling and encouraging them to mobilize medium- to long-term resources from the local market. The CBSF not only facilitated funding to NBFIs and financial institutions, but also strengthened these institutions by providing technical assistance on finance and management. In addition, the capacity of financial institutions was enhanced through business planning and resource management.

      The World Bank is also strengthening the capacity of Bangladesh Bank¹⁰ and is reforming the SCBs under the Enterprise Growth and Bank Modernization Project¹¹ and the Second Development Support Credit Project.¹² Progress on key reforms has been integrated in the International Monetary Fund’s Poverty Reduction Growth Facility. The Government is facilitating the automation of the credit information bureau at Bangladesh Bank to ensure the availability of credit history for all SMEs through a 16-month grant project funded by the Department for International Development (DFID) of the United Kingdom and managed by the International Finance Corporation’s (IFC’s) South Asia Enterprise Development Facility (SEDF). The project commenced in May 2009 and will be completed by September 2010. This will enable coverage of all SME borrowers and will help the banks to shift from purely collateral-based lending to cash-flow-based lending that emphasizes greater reliance on character, better understanding of the business, and credit rating information at the outset of the credit relationship with SMEs.