CONCLUSION AND POLICY IMPLICATIONS

It can be concluded that this bank-level study on excess liquidity in Bangladesh has given further insight into the long and ongoing debate on financial liberalisation, its effectiveness and success. The results showed that along with the process of financial liberalisation, the excess liquidity situation in the banking sector increased indicating that it was unable to fully achieve one of its objectives of increasing credit supply well enough to reduce excess liquidity. The result was comprehensive in the sense that it used two different and wide-ranging measures of financial liberalisation with both providing similar conclusions as well as the findings were found to hold across different types of banks30.

30 _{It should be noted that there may be difference between the short- and long-run}

effects. But T is not large enough in this study to investigate the presence of different effects for the short and the long-run. Therefore, this point is not investigated,

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 Average Old Banks Average New Banks

This study allowed one to frame specific policies and its implementations based on different bank-specific characteristics. One significant feature of this study was that it used bank-level data which helped in understanding better the differences at bank-level and to classify the banks according to different typology and examine the effect accordingly.

For ownership typology, it was found that public banks had higher excess liquidity than private banks. Therefore, it is important that public banks step up their lending in normal times rather than using the advantage of government backing. On the other hand, careful attention is needed so that private banks do not lend injudiciously, which may look good in short- run but can be detrimental in long-run due to the higher risk associated with imprudent lending.

Similarly, for age typology, old banks were found to be having more excess liquidity than the new banks. Hence, old banks were needed to be encouraged to lend more using their advantages in lending towards large firms. Since Bangladesh is a country with many small firms, old banks were needed to concentrate in increasing their lending scope by raising lending to small firms and consumers. Specific targets should be set for these types of banks by the central bank in this regard as was done by the central bank in other cases (e.g., specific targets were set for agricultural lending by the central bank in Bangladesh). On the other hand, new banks should be monitored so that they do not overlend, particularly during the initial years to survive. An initial period of a few years of support may help these banks to lend more prudently and survive in this very competitive sector.

This study observed no significant difference for mode of operation and size typologies. These results suggested that policies should be formulated and implemented on a priority basis where the characteristics of ownership and age need to be addressed first. This also supported the view that ‘one size fits all’ approach should be avoided and specific policies need to be formulated keeping in mind different bank-specific characteristics.

Although bank-level variations are observed, this does not mean that general policies are harmful and should not be taken. What this study points out is that only general policies are not enough and tailor-made policies for different bank characteristics based on the above findings can be very helpful in terms of effectiveness. Therefore, a multidimensional approach should be taken to get the maximum benefit or attainment of the objective since these characteristics were overlapping for banks. Moreover, special attention needs to be given for the variation in interest rates according to bank-specific characteristics. As observed from Figures 4.8 to 4.11, rate of interest played an important role in lending and variation in interest rates had an impact to difference in lending. Therefore, steps need to be taken to address this variation and reduce it to a level so that lending does not differ much according to these bank-specific characteristics.

The financial liberalisation index constructed and applied in this study showed that although liberalisation started in Bangladesh in the early 1990s, it was still far from reaching its completion stage. Hence, it is very important that the remaining process is incorporated and accomplished with urgency so that maximum benefit from it can be achieved.

Sequencing of liberalisation can also play a crucial role in achieving the benefit from this process. If a country is at its early stage, then it is very important to keep in mind this process of sequencing. But for countries where the process started long back and was in place for years, it might be useful to work on strengthening the institutional factors as a pre-requisite for the success of financial liberalisation (Caprio et al., 2006).

APPENDIX 4.1: Data availability of banks in Bankscope