Reform, Financial Systems and Legal Frameworks
Edited by Thankom Gopinath Arun and John Turner
Chapter 8: Improving Corporate Governance of Banks: Issues and Experience from Bangladesh
M. Masrur Reaz INTRODUCTION Banks execute a crucial function of financial intermediation between savers and investors. Hence, it is essential for economies to develop efficient and stable banking sectors, and this need is particularly acute in developing countries. Having recognized the need, many developing countries have initiated financial reform measures in order to improve the efficiency of banking firms. Seminal studies by McKinnon (1973) and Shaw (1973) presented the theoretical arguments for the widespread adoption of financial reform measures, both authors strongly arguing that such reforms support the development of deeper financial systems which can, in turn, support economic growth. However, despite the implementation of rigorous financial sector reform measures, many argue that the results have been disappointing (Jalilian and Kirkpatrick, 2001). In many cases, a failure to recognize the imperfect characteristics of financial markets, and premature deregulation, has led to adverse consequences for the stability of the financial system itself (Brownbridge and Kirkpatrick, 2000). Hence, it is important to develop appropriate institutional mechanisms in advance of, or alongside, financial reform measures, which will ensure the smooth operation of liberalized financial systems. Since financial intermediaries gain total control of funds owned by depositors, mechanisms to mitigate moral hazard on the part of the intermediaries require particular attention. Corporate governance is considered to be one such institutional means that aims to align decision making in financial institutions with that of the best interest of their stakeholders. This chapter aims to highlight, using the case of the Bangladesh banking sector, issues that...
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