Politics, society and financial sector reform in Bangladesh

Examines the financial sector reform experience of Bangladesh. Finds that, while there have been some improvements in competition and efficiency, loan defaults still remain a significant problem. 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. Provides a principal-agent explanation of politicians’ behavior. Concludes that effective implementation of an optimal policy mix depends on complex political and institutional factors. Agues that without moral norms donor agency-engineered formal institutional reforms become meaningless. Emphasizes the role of civil society organizations in creating and maintaining ethical social behavior, 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.