Why our financial sector lags behind the real economy

Bangladesh's economy presents a striking contrast. Its markets for real sector products such as consumer goods, construction materials, pharmaceuticals, and real assets like land and apartments are relatively robust, with their share of GDP comparable to peer countries. The same, however, cannot be said for financial products such as corporate bonds, life insurance policies, and mutual funds. These markets remain among the least developed in the region. Even countries with lower per capita income, including Nepal and Pakistan, have more advanced financial markets.

Bangladesh's banking sector, which flourished after World Bank-mandated financial reforms in the early 1990s, has steadily declined, with deposit and loan growth now lagging far behind nominal GDP. Why does this disparity persist between a thriving real sector and a struggling financial one?

The answer lies in the nature of the products. Real sector goods involve tangible items and immediate value exchange; buyers receive groceries or materials at the point of payment. In such transactions, the role of legal and regulatory authorities is minimal because trust is built through instant delivery.

Financial products, by contrast, are fundamentally different. They represent claims on future cash flows, their value depending on the present worth of payments expected years later. A life insurance policyholder, for example, may pay premiums for decades before any payout is made. This complexity makes the development of financial markets heavily dependent on a sound legal and regulatory system that encourages trust and credibility.

For financial markets to function effectively, a country needs a strong legal system to enforce contracts between issuers and investors. Without reliable enforcement, investors cannot trust that promised payments will be honoured. Equally critical are competent regulatory institutions that ensure issuers remain adequately capitalised, solvent, and transparent.

In Bangladesh, these foundations have long been weak, and the situation has worsened over the past decade. Regulators have often been influenced by vested interests seeking to exploit financial institutions. Licences for banks, insurance companies, and mutual fund managers have frequently been issued not to promote financial inclusion or stability but to enable insiders to siphon off public funds. This erosion of integrity has undermined confidence and stifled the growth of financial markets.

The lag in Bangladesh's financial sector carries serious consequences. A robust financial system is essential for channelling household savings into productive investments, supporting real sector growth, and helping households and businesses manage risks. An underdeveloped insurance market limits businesses' ability to mitigate risk, while a weak corporate bond market restricts firms' access to long-term capital. The banking sector's decline further constrains financial intermediation, as slower deposit and loan growth reduces lending capacity. Without a dynamic financial sector, Bangladesh's economic progress is curtailed because savings cannot be efficiently channelled into building productive capacity.

To close this gap, Bangladesh must pursue comprehensive financial sector reform. Strengthening governance is crucial; regulatory institutions need to be independent, transparent, and insulated from political influence. Upholding the rule of law is equally important to ensure contract enforcement and protect investors. Rebuilding institutional credibility through stricter licensing, regular audits, and penalties for misconduct will help restore public trust. Public awareness campaigns could also educate citizens about the risks and benefits of financial products, enabling them to make informed decisions when choosing service providers.

Bangladesh's real economy has shown remarkable resilience, but its financial sector remains the weak link. Without urgent reform, the gap will only widen, threatening long-term growth. By fostering a trustworthy and resilient financial system, Bangladesh can unlock its full economic potential, ensuring household savings drive sustainable development.

The writer is CEO of VIPB Asset Management Company and former president of CFA Society Bangladesh