Regulation and Supervision: a Policy Choice Essay

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1. Introduction: There is no denying the fact that the financial system plays a significant role in the economic development of a country. The importance of an efficient financial sector lies in the fact that, it ensures domestic resources mobilization, generation of savings, and investments in productive sectors. In fact, it is the system by which a country’s most profitable and efficient projects are systematically and continuously directed to the most productive sources of future growth. The financial system not only transfers funds from savers to investors but also must be able to select projects which will yield the highest returns, accumulate sufficient quantities of capital to fund the range of investment projects across economic activities, account for price risks across assets, monitor performance, and enforce contracts. According to the McKinnon- Shaw hypothesis (1973), the conventional wisdom is that flexibility and efficiency of the financial system are crucial to the growth and development of a market economy. A comprehensive study by King and Levine (1993) from across 119 developed and developing countries over the 1960-1989 period provides compelling evidence that economic growth is dramatically dependent on the size of financial sector, credit to private sector and enterprises and interest rates. The larger the financial sector in the context of the overall economy, the greater the share of lending by depository rather than central banks, and the greater the share of credit to private sector rather than public sector, the greater is the rate of economic growth. 2. Literature Review: Financial sector in Bangladesh, like most in developing countries, is dominated by banking institutions. With recent gains in financial fronts Bangladesh's financial sector is now comparable with most of the countries in South and East Asia in terms of financial
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