Working Paper
Politics, Society and Financial Sector Reform in Bangladesh

This paper examines the financial sector reform experience of Bangladesh. It finds that while there have been some improvements in competition and efficiency, loan defaults still remain a significant problem. It also finds urban bias in loan allocation and shift of resources away from the rural sector. The main obstruction in the area of loan recovery is political interference. It provides a principal-agent explanation of the behaviour of politicians. The paper concludes that effective implementation of an optimal policy mix depends on complex political and institutional factors- both formal and informal. It agues that without moral norms that guide transactions among social agents, donor agency-engineered formal institutional reforms become meaningless. The paper emphasizes the role of civil society organizations in creating and maintaining ethical social behaviour, especially when state agents themselves are involved in fraudulent activities. In the absence of generalized morality and in a society where transactions are still guided predominantly by relationships, perhaps market-oriented policy reform may increase transactions cost.