THE BANGLADESH DEVELOPMENT STUDIES

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Abstract

The Protishthan carries out basic research studies on the problems of development in Bangladesh. It also provides training in socio-economic analysis and research methodology for the professional members of its staff and for members of other organisations concerned with development problems. This paper uses a bank profit maximisation model based on empirical industrial organisation approach to explain the interest rate spread (IRS) in the banking sector of Bangladesh using panel data of 48 banks covering the period of 2004 to 2008. The analysis shows that the higher the non-interest income as a ratio of total assets of a bank, the lower its spread. Similarly, market share of deposits of a bank, statutory reserve requirements, and NSD certificate interest rates affect the IRS. The analysis in terms of bank groups shows that IRS is significantly influenced by operating costs and classified loans for state owned commercial banks (SCBs) and specialised banks (SBs); while inflation, operating costs, market share of deposits, statutory reserve requirements, and taxes are important for the private commercial banks (PCBs). On the other hand, non-interest income, inflation, market share, and taxes matter for the foreign commercial banks (FCBs). The analysis brings out several systemic actions and measures at the bank level to improve earnings and profitability of the banks which are sustainable tools of reducing the IRS.

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SOME INDICATORS OF BANGLADESH'S BANKING SYSTEM

Figure 1 : Trends in Nominal Deposit and Lending Rates and IRS Figure 2: Trend in Real Deposit and Lending Rates

source: Scheduled Banks Statistics and Bangladesh Bank Quarterly, various issues, Bangladesh Bank.

RECENT MOVEMENTS IN IRS IN BANGLADESH

Source: Publications of respective central banks. Note: IRS of Bangladesh for 2009 refers to end May 2009. TRENDS IN IRS OF SELECTED SOUTH ASIAN COUNTRIES

SOME INDICATORS RELATED TO IRS IN BANGLADESH TABLE IV

Source: Department of Off-site Supervision and Statistics Department, Bangladesh Bank. EARNINGS AND PROFITABILITY BY BANK GROUPS IN BANGLADESH

Source: Scheduled Banks Statistics, various issues, Bangladesh Bank. SHARES IN TOTAL DEPOSITS AND TOTAL ADVANCES BY BANK GROUPS

RESULTS OF EMPIRICAL ESTIMATION: DIFFERENT BANK GROUPS

Figure 1: Nominal Exchange Rate Movement and Its Volatility To what extent Bangladesh attempts to stabilise exchange rates by intervening in the foreign exchange market? To answer this question, we look at relative volatilities of the exchange rate, reserves, interest rates and inflation. We choose to work with relative volatilities, because we think that comparisons based solely on the volatility of exchange rates alone, or of reserves alone, could be misleading. The exchange rate could be more volatile simply because it is subject to larger external shocks. Comparing exchange rate volatilities does not provide a complete idea of the willingness of the authority to defend its parity. It may be the case that the central bank is intervening in the foreign exchange market to keep the exchange rate within certain limits, while during the period of less volatility the authority is letting the exchange rate float independently. Similarly, comparing volatility of reserves may be problematic too. It is possible for reserves during a particular period to be relatively stable due to the absence of shocks that would have warranted a movement in the exchange rate, or in case the authority intervenes heavily, if a shock warrants it. However, a possible drawback of using relative volatilities is that one does not know if the ratio is high because of the numerator being unusually high or the denominator unusually low. But intervention in the foreign exchange market is not the only channel that monetary authorities have in order to influence movements in the exchange rate. They can also affect it by tightening or loosening monetary policy. Thus, in this section we will look at relative volatility of exchange rates and interest rates as another indication of the degree to which monetary authorities are willing to let the exchange rate float freely.

Source: Authors’ estimation based on data from Bangladesh Bank; IFS.

COMPARISON OF VOLATILITY OF EXCHANGE RATES (COEFFICIENT OF VARIATION) The findings in this section indicate that the way Bangladesh manages exchange rate is, by and large, not consistent with the characteristics of freely floating exchange rate egime. Evidently, Bangladesh Bank often intervenes in the foreign exchange market in order to keep the nominal exchange rate almost fixed or to allow it to move within a very 1arrow range (also evident in Table III). However, the extent of intervention and its mpact on exchange rate regime remain unclear from the analysis of this section. Thus, we examine the de facto exchange rate regime of Bangladesh in the following section. TABLE II

(in million US$) Source: Forex Reserve and Treasury Management Department (FRTMD), Bangladesh Bank.

DE FACTO REGIME CLASSIFICATION CRITERIA

DE FACTO CLASSIFICATION OF EXCHANGE RATE REGIME IN BANGLADESH, 2000-2008

Figure 2 shows that exchange market pressure (EMP) is positive in Bangladesh during the period under consideration; however, during 2005-2006 the extent of imbalance in the foreign exchange market was severe. It appears from the index IC that shocks were more frequent and several times it crosses the crisis threshold during the period 2005-2006, which can be characterised as turbulent period. However, for the period 2007-08 the EMP is found to be very low, indicating equilibrium in the foreign exchange rate market. Figure 2: Exchange Market Pressure Index

Figure 3: Percentage Change in Net Foreign Assets (NFA) and Percentag¢ Change in Net Domestic Assets (NDA) VI. EXCHANGE RATE PASS-THROUGH

ESTIMATES OF INFLATION PASS-THROUGH (2000-2008) TABLE VI

Figure 4: Bangladesh's Aggregate and Bilateral REERs Based on CPI (2000 = 100) (A Rise Indicates Real Appreciation) Figure 4: Bangladesh's Aggregate and Bilateral REERs Based on CP (2000 = 100) (A Rise Indicates Real Appreciation)

Figure 5: Bangladesh’s Aggregate and Bilateral NEERs (A Rise Indicates Appreciation) VIII. EQUILIBRIUM REER AND MISALIGNMENT

ADF AND PP TESTS FOR UNIT ROOT’

Based on the estimated cointegrating vector, the long-run equilibrium equation can be written as:

Figure 6: Actual and Equilibrium REER

MOTHER'S AND CHILD'S NUTRITIONAL STATUS BY HOUSEHOLD POVERTY LEVEL

NUTRITIONAL STATUS OF THE CHILDREN BY MOTHER'S NUTRITIONAL STATUS

Other well-being measures are also indicative of the favourable effects of mother’s nutritional status on child well-being. For example, proportion of children dead is much higher for severely malnourished mothers; a higher proportion of these women encounter premature termination of pregnancy due to still birth and miscarriage; and a higher ratio among them tend to deliver smaller size babies. Also, a greater proportion of their children remain more susceptible to sickness. Indeed one also finds that the malnourished mothers use much less contraception than their healthier counterparts and produce, on average, more children.° PER CENT CHILDREN MALNOURISHED (<2SD) BY MATERNAL NUTRITION (MEASURED BY BMI) AND HOUSEHOLD POVERTY STATUS: DHS 2000

The above results are based on aggregate decision making score considered over several dimensions of decision making. It is, therefore, of interest to examine these dimensions individually. Table VI presents disaggregated results with respect to maternal nutrition. Two key aspects are noteworthy. First, remarkably enough, for all aspects of decision-making the favourable effect on For what it is worth all the proxy indicators of women’s empowerment available from DHS are found to be positively correlated with improved maternal nutrition. Indeed, mother’s nutritional status varies substantially with ed ucation and exposure to media. The proportion of malnourished mothers is 49 per cent for the uneducated mothers as opposed to 9 per cent for the highly educat (Table V). These figures in case of women with “some exposure to med “no exposure to media” are 35 and 50 per cent respectively. These varia the case of women’s domestic decision-making role are also considerable: ed ones ia” and tions in 48 pet cent for those with no decision making role as opposed to 32-41 per cent for thei counterparts with medium and high decision making roles. The effect is especially important for the severely malnourished mothers.

Note: Figures represent percentages of row total. DISTRIBUTION OF MOTHERS BY DECISION-MAKING ROLE AND BMI WITH REFERENCE TO PARTICULAR DOMESTIC DECISION-MAKING ROLE

PER CENTAGE OF MOTHERS ‘MALNOURISHED’ AND ‘SEVERELY MALNOURISHED’ BY EMPOWERMENT CHARACTERISTICS ACROSS POVERTY GROUPS

PROPORTION OF CHILDREN MALNOURISHED AND SEVERELY MAL NOURISHED BY WOMEN'S AGENCY CHARACTERISTICS