Impact of Recent Financial Crices of the World in Bangladesh

REPORT ON THE IMPACT OF RECENT WORLD FINANCIAL CRISIS IN BANGLADESH

Prepared by Dipock Mondal

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ACKNOWLEDGEMENT

For the completion of this report visiting websites, articles and related documents were

required. However, it was our instructor, Meharunnasa Eva who played the important

role by giving us an insight about the report. We express our profound indebtedness and

gratitude to her, for her valuable advice that helped immensely in preparing this report.

We also very much grateful to the librarian of public library, who helps us by providing

all kinds informational support for this report.

We are also pleased to the library officials of BBA campus of Northern University

Bangladesh who always support us for any kind of book.

We are also thankful to our fellow students, who helped us a lot to prepare this report.

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Executive Summary

The stock price plunge and severe credit crunch we are watching today in global financial

markets are byproducts of the developments in the US six years ago. In late 2001, fears of

global terror attacks after 9/11 shook an already struggling US economy, one that was

just beginning to come out of the recession induced by the bursting of the dotcom bubble

of late 1990s.

In response, during 2001, the Federal Reserve, the US central bank, began cutting interest

rates dramatically to encourage borrowing, which spurred both consumption and

investment spending. As lower interest rates worked their way into the economy, the real

estate market began to get itself into frenzy. The number of homes sold and the prices

they sold for increased dramatically, beginning in 2002. At the time, the rate on a 30-year

fixed rate mortgage was at the lowest levels seen in nearly 40 years.

Sub prime and similar mortgage originations in the US rose from less than 8 percent of

all mortgages in 2003 to over 20 percent in 2006.

The crisis began with the bursting of the US housing bubble and high default rates on sub

prime and adjustable rate mortgages, beginning in approximately 2005-2006. For a

number of years prior to that, declining lending standards, an increase in loan incentives

such as easy initial terms, and a long-term trend of rising housing prices had encouraged

borrowers to assume difficult mortgages in the belief they would be able to quickly

refinance at more favorable terms.

However, once interest rates began to rise and housing prices started to drop in 2006-

2007 in many parts of the US, refinancing became more difficult. Default and foreclosure

activity increased dramatically as easy initial terms expired, home prices failed to go up

as anticipated, and adjustable rate mortgage interest rates reset higher. Foreclosures

accelerated in the United States in late 2006 and triggered a global financial crisis

through 2007 and 2008.

Initially the companies affected were those directly involved in home construction and

mortgage lending. Financial institutions, which had engaged in the securitization of

mortgages, fell prey subsequently. The rest is history.

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The crisis is still unfolding. There remains great uncertainty as to the depth and severity

of the crisis as well as its impact on the real sectors (so called main streets) in US and

Europe. This makes it difficult to assess clearly how it will impact Bangladesh.

Foreign capital flows are largely in the form of confessional official lending. FDI and

foreign portfolio investments are small. However, Bangladesh’s economy relies heavily

on garment exports. This is where the main risk lies. Remittances may also be vulnerable.

On the positive side, import payments may be favorably affected as a result of declining

commodity prices, particularly oil and food.

The export sector is potentially the most vulnerable in Bangladesh since it depends

heavily on US and EU economies. The readymade garment (RMG) industry accounts for

over three quarters of export earnings and depends almost entirely on US and EU

markets. There is growing concern that a deep and prolonged recession in the US and EU

may reduce consumer spending significantly across the board, thus undermining the

demand for Bangladeshi exports. BGMEA and BKMEA have indicated that growth in

export orders was slow in the first quarter of Fy08. IMF has projected that income growth

in Bangladesh’s export markets will decline from 1.5 percent in 2008 to 0.5 percent in

2009. If this happens, consumer spending will decline.

Although demand for Bangladesh’s exports is not too sensitive to income, export prices

may decline and this could have significant effects on our export earnings even if export

volumes remain largely unaffected.

There is unlikely to be any direct immediate impact on remittances. Remittances in

Bangladesh proved to be resilient during previous financial crises in the world. The bulk

(over 60 percent) of Bangladesh’s remittances come from the Middle East, and less than

one-third come from the US, UK and Germany. Strong remittance growth (44 percent)

has continued in the first quarter of FY09.

Import is probably the one channel through which Bangladesh may benefit. Import

payments in August have reportedly been US$531 million lower than import payments in

July. This decline in import payments is mainly due to the fall in prices of petroleum

products, wheat and edible oil. Record high oil prices last year raised import payments to

over US$20 billion in FY08, compared to slightly over US$15 billion in payments in

FY07. The gains on account of reduced import payments can be sizable.

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Bangladesh’s remarkable resilience so far to this ongoing global financial crisis and

slowing growth in high-income countries is in large part because of the country’s relative

insulation from international capital markets and the negligible role played by foreign

portfolio investors in the country. This resilience also derives from sound policy

framework and macroeconomic fundamentals. However, investor psychology is much

less insulated than the capital market itself, as demonstrated by the sudden increase in

volatility in Dhaka and Chittagong Stock Exchanges.

The overall financial leverage in Bangladesh is low. Unlike the global financials,

Bangladesh’s banking system has no toxic derivative engagements. Barring a prolonged

slowdown in the world economy leading to a drastic reduction in RMG exports, it is

highly unlikely that the external shocks will increase the risk of asset quality problems or

precipitate a credit crunch in Bangladesh. This is due to Bangladesh’s low level of

external debt, robust international reserves, and limited direct exposure to the

international financial system.

.Policy makers have to make sure that markets do not panic by continuously providing

evidence on the economy’s resilience in various sectors. They must proactively monitor

the channels through which the global financial turmoil may start creeping into the

Bangladesh economy and take appropriate mitigation measures.

Inflation has recently been the biggest macro policy challenge in Bangladesh. With the

aggravation of the financial turmoil we have seen a sharp decline in global commodity

prices. This makes the inflation battle a little easier for Bangladeshi policymakers. But

new policy dilemmas are likely to emerge if export earnings begin to slow down and

currencies of Bangladesh’s competitor countries depreciate. This will put exchange rate

policy under pressure to maintain export competitiveness.

Market interventions aimed at depreciating the currency will dilute through declining

international commodity prices to domestic prices and, consequently, undermine the

objective of reducing inflation from its current double-digit level.

For Bangladesh a more momentous shock over the past couple of years has been the

soaring price of commodities, which some have also blamed on financial speculation.

The food-price spike in late 2007 and early 2008 caused havoc to the lives of the poor

and middle-income groups. In response, the government extended its reach by increasing

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subsidies and expanding safety nets. FY09 budget has already built-in an expansionary

stance to continue providing support to the poor so that they can afford to pay the high

food prices.

However, overall, there is absolutely no reason to panic. Bangladesh is relatively

insulated from the financial side, but vulnerable to potential global economic slowdown,

particularly in the US and EU. The foreign exchange reserves of Bangladesh Bank and

commercial banks have limited exposure to the securities markets and banking system

risk in the US and EU.

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TABLE OF CONTENTS

Index Page

Chapter 1

Introduction of the Report

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Introduction 12

Objective of the report 13

Chapter 2

Methodology

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Methodology of the study 15

Limitations of the study 15

Chapter 3

About financial crisis

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Definitions 17

Types of financial crisis 18

Chapter 4

Causes of financial crisis

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General causes of financial crisis22

Causes of financial crisis in Bangladesh28

Chapter 5 Impact of financial crisis

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Impact of financial crisis among the world32

Impact of financial crisis on Bangladesh33

Chapter 6

Findings41

Key findings from the report42

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Chapter 7

Recommendation43

Recommendation44

Bibliography45

1.0 Introduction of the Report

1.1 Introduction 1.2 Objective of the report

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1.1. INTRODUCTION:

The crisis first emerged as a liquidity crisis. The first symptoms appeared at the

beginning of August 2007, when serious disruptions surfaced on the inter-bank market in

the Western world. More than a year later, tensions on money markets are still with us.

Recent months have witnessed abnormal levels of spreads, a shortening of maturities, and

the contraction, or even closure, of some market segments. Through spill-over, these

tensions are also affecting non-financial corporations and, more broadly the financing of

the economy. They also have spilled over to emerging market economies, which had until

the autumn 2008 remained largely unaffected. The crisis also emerged as a crisis of

securitization. Securitization is an old and successful technique used to refinance a range

of loans. What was new about it is that it got used extensively in highly unstable financial

structures. These were financing short-term illiquid and complex assets whose value

proved to be uncertain and contingent upon models. The instability of such structures was

largely masked. Indeed, cheap money allowed easy refinancing of poor quality debt and

of assets with uncertain value. Also, favorable ratings and credit enhancements

artificially boosted the quality of loans underlying structured products. The rise in

defaults on such loans, first on supreme mortgages, triggered a chain of reactions whose

consequences are still unfolding now. Credit protections proved illusory. Liquidity dried

up much more quickly than it had appeared. Rating agencies massively, suddenly and

sharply downgraded products which until then were deemed of the highest quality.

The term financial crisis is applied broadly to a variety of situations in which

some financial institutions or assets suddenly lose a large part of their value. In the 19th

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and early 20th centuries, many financial crises were associated with banking panics, and

many recessions coincided with these panics. Other situations that are often called

financial crises include stock market crashes and the bursting of other financial bubbles,

currency crises, and sovereign defaults.

1.2. OBJECTIVE OF THE REPORT:

ORIGIN OF THE REPORT

The topic has been chosen by our course teacher Meharunnasa Eva, Lecturer,

Department of Business Administration, Northern University Bangladesh. According this

report on “The Impact of World Recent Financial Crisis in Bangladesh” has been

prepared under the proper guidance of the respectable supervisor.

OBJECTIVE OF THE REPORT

The overall objective of the study is to provide an exposure of real life situation to

the students where they are expected to translate and adapt the knowledge gained from

the BBA courses into by the theoretical knowledge in practical field.

BROAD OBJECTIVE

To identify the impact of world recent financial crisis in Bangladesh.

SPECIFIC OBJECTTIVE

The prime objectives of the report are as follows:

1. To identity the basic causes of Financial Crisis.

2. To find out the effects of Financial Crisis.

3. To analyze it’s contribution to the national & the international economy.

4. To identity it’s effects on globalization.

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5. To identity the contribution of Financial Crisis to decline stability of a well-

organized and vibrant capital market particularly money market.

6. To identity the financial impact on various countries’ economic and commercial

capability.

2.0. Methodology

2.1. Methodology of the study2.2. Limitations of the study

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2.1. METHODOLOGY OF THE STUDY:

The report is prepared using qualitative research method. The data were relatively

disorganized and collected based on our limited knowledge.

The report has been prepared based on secondary data such as-the published

reports, various articles, and related documents as well as down loaded data from website

through internet. We have studied the sources of information, then all these reports and

documents are also been analyzed and organized to make our report possible according to

the topic of The Impact of Recent World Financial Crisis in Bangladesh.

2.2. LIMITATIONS OF THE STUDY:

This study is mainly depended on the secondary data. Limited primary data are

also used. A time constraint was another limitation in comparison of the vastness of the

topic. Much information was possible to gather but we can’t gather with our limited

knowledge .But we have tried our level best to make this report possible.

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Historical Background

3.1. DEFINITIONS:

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Financial Crisis is a sharp deterioration of a group of financial indicators, such as

short-term interest rates and asset prices, potentially also accompanied by failures of

financial institutions. Such crises have been a long-term subject of interest in economics

and have begun to generate a broader body of interdisciplinary research in the social

sciences as economies become more financially interdependent. A financial boom or

bubble is characterized by a shift of wealth out of money holdings and into real and long

term financial assets, stocks or bonds, for instance and sustained on the basis of

expectations of capital gains.

Financial crisis is a situation in which the supply of money is outpaced by the

demand for money. This means that liquidity is quickly evaporated because available

money is withdrawn from banks (called a run), forcing banks either to sell other

investments to make up for the shortfall or to collapse.

Financial crisis is a situation when money demand quickly rises relative to

money supply. Until a few decades ago, a financial crisis was equivalent to a banking

crisis. Today it may also take the form of a currency crisis. Many economists have come

up with theories on how a financial crisis develops and how it could be prevented. There

is, however, no consensus and financial crises are still a regular phenomenon. A stock

market crash is an example of a financial crisis.

3.2. TYPES OF FINANCIAL CRISIS:

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Banking crises

When a bank suffers a sudden rush of withdrawals by depositors, this is called a

bank run. Since banks lend out most of the cash they receive in deposits, it is difficult for

them to quickly pay back all deposits if these are suddenly demanded, so a run may leave

the bank in bankruptcy, causing many depositors to lose their savings unless they are

covered by deposit insurance. A situation in which bank runs are widespread is called a

systemic banking crisis or just a banking panic. A situation without widespread bank

runs, but in which banks are reluctant to lend, because they worry that they have

insufficient funds available, is often called a credit crunch. In this way, the banks become

an accelerator of a financial crisis. Examples of bank funds include the run on the Bank

of the United States in 1931 and the run on Northern Rock in 2007. The collapse of Bear

Stearns in 2008 has also sometimes been called a bank run, even though Bear Stearns was

an investment bank rather than a commercial bank. The U.S. savings and loan crisis of

the 1980s led to a credit crunch which is seen as a major factor in the U.S. recession of

1990-91.

Speculative bubbles and crashes

Economists say that a financial asset (stock, for example) exhibits a bubble when

its price exceeds the present value of the future income (such as interest or dividends that

would be received by owning it to maturity). If most market participants buy the asset

primarily in hopes of selling it later at a higher price, instead of buying it for the income

it will generate, this could be evidence that a bubble is present. If there is a bubble, there

is also a risk of a crash in asset prices: market participants will go on buying only as long

as they expect others to buy, and when many decide to sell the price will fall. However, it

is difficult to tell in practice whether an asset's price actually equals its fundamental

value, so it is hard to detect bubbles reliably. Some economists insist that bubbles never

or almost never occur. Well-known examples of bubbles (or purported bubbles) and

crashes in stock prices and other asset prices include the Dutch tulip mania, the Wall

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Street Crash of 1929, the Japanese property bubble of the 1980s, the crash of the dot-com

bubble in 2000-2001, and the now-deflating United States housing bubble.

International financial crises

When a country that maintains a fixed exchange rate is suddenly forced to

devalue its currency because of a speculative attack, this is called a currency crisis or

balance of payments crisis. When a country fails to pay back its sovereign debt, this is

called a sovereign default. While devaluation and default could both be voluntary

decisions of the government, they are often perceived to be the involuntary results of a

change in investor sentiment that leads to a sudden stop in capital inflows or a sudden

increase in capital flight. Several currencies that formed part of the European Exchange

Rate Mechanism suffered crises in 1992-93 and were forced to devalue or withdraw from

the mechanism. Another round of currency crises took place in Asia in 1997-98. Many

Latin American countries defaulted on their debt in the early 1980s. The 1998 Russian

financial crisis resulted in a devaluation of the ruble and default on Russian government

bonds.

Wider economic crises

Negative GDP growth lasting two or more quarters is called a recession. An

especially prolonged recession may be called a depression, while a long period of slow

but not necessarily negative growth is sometimes called economic stagnation. Since these

phenomena affect much more than the financial system, they are not usually considered

financial crises per se. But some economists have argued that many recessions have been

caused in large part by financial crises. One important example is the Great Depression,

which was preceded in many countries by bank runs and stock market crashes. The sub

prime mortgage crisis and the bursting of other real estate bubbles around the world is

widely expected to lead to recession in the U.S. and a number of other countries in 2008.

Nonetheless, some economists argue that financial crises are caused by recessions instead

of the other way around. Also, even if a financial crisis is the initial shock that sets off a

recession, other factors may be more important in prolonging the recession. In particular,

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Milton Friedman and Anna Schwartz argued that the initial economic decline associated

with the crash of 1929 and the bank panics of the 1930s would not have turned into a

prolonged depression if it had not been reinforced by monetary policy mistakes on the

part of the Federal Reserve, and Ben Bernanke has acknowledged that he agrees.

4.0. Causes of financial crisis

4.1. General causes of financial crisis

4.2. Causes of financial crisis in Bangladesh

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4.1. GENERAL CAUSES OF FINANCIAL CRISIS:

Strategic complementarities in financial markets

It is often observed that successful investment requires each investor in a financial

market to guess what other investors will do. George Soros has called this need to guess

the intentions of others 'reflexivity'. Similarly, John Maynard Keynes compared financial

markets to a beauty contest game in which each participant tries to predict which model

other participants will consider most beautiful. Furthermore, in many cases investors

have incentives to coordinate their choices. For example, someone who thinks other

investors want to buy lots of Japanese yen may expect the yen to rise in value, and

therefore has an incentive to buy yen too. Likewise, a depositor in IndyMac Bank who

expects other depositors to withdraw their funds may expect the bank to fail, and

therefore has an incentive to withdraw too. Economists call an incentive to mimic the

strategies of others strategic complementarities. It has been argued that if people or firms

have a sufficiently strong incentive to do the same thing they expect others to do, then

self-fulfilling prophecies may occur. For example, if investors expect the value of the yen

to rise, this may cause its value to rise; if depositors expect a bank to fail this may cause it

to fail. Therefore, financial crises are sometimes viewed as a vicious circle in which

investors shun some institution or asset because they expect others to do so.

Leverage

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Leverage, which means borrowing to finance investments, is frequently cited as a

contributor to financial crises. When a financial institution (or an individual) only invests

its own money, it can, in the very worst case, lose its own money. But when it borrows in

order to invest more, it can potentially earn more from its investment, but it can also lose

more than all it has. Therefore leverage magnifies the potential returns from investment,

but also creates a risk of bankruptcy. Since bankruptcy means that a firm fails to honor all

its promised payments to other firms, it may spread financial troubles from one firm to

another. The average degree of leverage in the economy often rises prior to a financial

crisis. For example, borrowing to finance investment in the stock market (margin buying)

became increasingly common prior to the Wall Street Crash of 1929.

Asset-liability mismatch

Another factor believed to contribute to financial crises is asset-liability

mismatch, a situation in which the risks associated with an institution's debts and assets

are not appropriately aligned. For example, commercial banks offer deposit accounts

which can be withdrawn at any time and they use the proceeds to make long-term loans

to businesses and homeowners. The mismatch between the banks' short-term liabilities

(its deposits) and its long-term assets (its loans) is seen as one of the reasons bank runs

occur (when depositors panic and decide to withdraw their funds more quickly than the

bank can get back the proceeds of its loans). Likewise, Bear Stearns failed in 2007-08

because it was unable to renew the short-term debt it used to finance long-term

investments in mortgage securities. In an international context, many emerging market

governments are unable to sell bonds denominated in their own currencies, and therefore

sell bonds denominated in US dollars instead. This generates a mismatch between the

currency denomination of their liabilities (their bonds) and their assets (their local tax

revenues), so that they run a risk of sovereign default due to fluctuations in exchange

rates.

Uncertainty and herd behavior

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Many analyses of financial crises emphasize the role of investment mistakes

caused by lack of knowledge or the imperfections of human reasoning. Behavioral

finance studies errors in economic and quantitative reasoning. Psychologist Torbjorn K A

Eliazonhas also analyzed failures of economic reasoning in his concept of 'œcopathy'.

Historians, notably Charles P. Kindleberger, have pointed out that crises often follow

soon after major financial or technical innovations that present investors with new types

of financial opportunities, which he called "displacements" of investors' expectations.

Early examples include the South Sea Bubble and Mississippi Bubble of 1720, which

occurred when the notion of investment in shares of company stock was itself new and

unfamiliar, and the Crash of 1929, which followed the introduction of new electrical and

transportation technologies. More recently, many financial crises followed changes in

the investment environment brought about by financial deregulation, and the crash of the

dot com bubble in 2001 arguably began with "irrational exuberance" about Internet

technology. Unfamiliarity with recent technical and financial innovations may help

explain how investors sometimes grossly overestimate asset values. Also, if the first

investors in a new class of assets (for example, stock in "dot com" companies) profit from

rising asset values as other investors learn about the innovation (in our example, as others

learn about the potential of the Internet), then still more others may follow their example,

driving the price even higher as they rush to buy in hopes of similar profits. If such "herd

behavior" causes prices to spiral up far above the true value of the assets, a crash may

become inevitable. If for any reason the price briefly falls, so that investors realize that

further gains are not assured, then the spiral may go into reverse, with price decreases

causing a rush of sales, reinforcing the decrease in prices.

Regulatory failures

Governments have attempted to eliminate or mitigate financial crises by

regulating the financial sector. One major goal of regulation is transparency: making

institutions' financial situations publicly known by requiring regular reporting under

standardized accounting procedures. Another goal of regulation is making sure

institutions have sufficient assets to meet their contractual obligations, through reserve

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requirements, capital requirements, and other limits on leverage. Some financial crises

have been blamed on insufficient regulation, and have led to changes in regulation in

order to avoid a repeat. For example, the Managing Director of the IMF, Dominique

Strauss-Kahn, has blamed the financial crisis of 2008 on 'regulatory failure to guard

against excessive risk-taking in the financial system, especially in the US'. Likewise, the

New York Times singled out the deregulation of credit default swaps as a cause of the

crisis. However, excessive regulation has also been cited as a possible cause of financial

crises. In particular, the Basel II Accord has been criticized for requiring banks to

increase their capital when risks rise, which might cause them to decrease lending

precisely when capital is scarce, potentially aggravating a financial crisis.

Fraud

Fraud has played a role in the collapse of some financial institutions, when

companies have attracted depositors with misleading claims about their investment

strategies, or have embezzled the resulting income. Examples include Charles Ponzi's

scam in early 20th century Boston, the collapse of the MMM investment fund in Russia

in 1994, the scams that led to the Albanian Lottery Uprising of 1997, and the collapse of

Madoff Investment Securities in 2008. Many rogue traders that have caused large losses

at financial institutions have been accused of acting fraudulently in order to hide their

trades. Fraud in mortgage financing has also been cited as one possible cause of the 2008

sub prime mortgage crisis; government officials stated on Sept. 23, 2008 that the FBI was

looking into possible fraud by mortgage financing companies Fannie Mae and Freddie

Mac, Lehman Brothers, and insurer American International Group.

Contagion

Contagion refers to the idea that financial crises may spread from one institution

to another, as when a bank run spreads from a few banks to many others, or from one

country to another, as when currency crises, sovereign defaults, or stock market crashes

spread across countries. When the failure of one particular financial institution threatens

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the stability of many other institutions, this is called systemic risk. One widely-cited

example of contagion was the spread of the Thai crisis in 1997 to other countries like

South Korea. However, economists often debate whether observing crises in many

countries around the same time is truly caused by contagion from one market to another,

or whether it is instead caused by similar underlying problems that would have affected

each country individually even in the absence of international linkages.

Recessionary effects

Some financial crises have little effect outside of the financial sector, like the

Wall Street crash of 1987, but other crises are believed to have played a role in

decreasing growth in the rest of the economy. There are many theories why a financial

crisis could have a recessionary effect on the rest of the economy. These theoretical ideas

include the 'financial accelerator', 'flight to quality' and 'flight to liquidity', and the

Kiyotaki - Moore model. Some 'third generation' models of currency crises explore how

currency crises and banking crises together can cause recessions.

Market instability

The recent market instability was caused by many factors, chief among them a

dramatic change in the ability to create new lines of credit, which dried up the flow of

money and slowed new economic growth and the buying and selling of assets. This hurt

individuals, businesses, and financial institutions hard, and many financial institutions

were left holding mortgage backed assets that had dropped precipitously in value and

weren’t bringing in the amount of money needed to pay for the loans. This dried up their

reserve cash and restricted their credit and ability to make new loans. There were other

factors as well, including the cheap credit which made it too easy for people to buy

houses or make other investments based on pure speculation. Cheap credit created more

money in the system and people wanted to spend that money. Unfortunately, people

wanted to buy the same thing, which increased demand and caused inflation. Private

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equity firms leveraged billions of dollars of debt to purchase companies and created

hundreds of billions of dollars in wealth by simply shuffling paper, but not creating

anything of value. In more recent months speculation on oil prices and higher

unemployment further increased inflation.

The housing market declined

The housing slump set off a chain reaction in our economy. Individuals and

investors could no longer flip their homes for a quick profit, adjustable rates mortgages

adjusted skyward and mortgages no longer became affordable for many homeowners, and

thousands of mortgages defaulted, leaving investors and financial institutions holding the

bag. This caused massive losses in mortgage backed securities and many banks and

investment firms began bleeding money. This also caused a glut of homes on the market

which depressed housing prices and slowed the growth of new home building, putting

thousands of home builders and laborers out of business. Depressed housing prices

caused further complications as it made many homes worth much less than the mortgage

value and some owners chose to simply walk away instead of pay their mortgage.

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4.2. CAUSES OF FINANCIAL CRISIS IN BANGLADESH:

Causes of recent manufacturing industry crisis

Bangladesh is primarily an agricultural based economy. However, in this new

world of technology, Bangladesh must transform itself into a IT nation. Currently there is

no large scale production of computer hardware or peripherals. Some Bangladeshi

companies, located on the web, claim to make computers. In reality, they buy the parts

from elsewhere, and assemble the homemade computers in Bangladesh. In addition,

Beyond.com has strong web presence on Bangladeshi sites. Due to these factors, one can

conclude that Bangladesh does not produce, export, or develop computer hardware.

However, the Bangladesh Computer Samity does hold a computer fair once a year at

which there is a section for product launching. Brand Names- Pentium, Intel, Hewlett

Packard, Apple, IBM, and Seagate- None of these world wide computer hardware

manufacturers have formal distribution, sales offices, or dealers located in Bangladesh.

However, many shops in Bangladesh offer these products. Local Computer Resellers-

Clone computers are big in Bangladesh. In order to fulfill the rapidly growing demand of

IT in Bangladesh, CITech Communications was established. They offer various product

and services including hardware and peripherals. Other web companies in Bangladesh

have sprung, offering similar services, such as the company 3A. I found 25 computer

companies located on the web that assembles computers locally from foreign made

components. Competitive Market- In a developing country like Bangladesh, all computer

stores are equal players. But some are more equal than others. For instance, Dofin

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Computers have a much bigger market presence than anyone else. With 5,000 clients,

this company sells micro computer systems for both home and professional use.Most of

them are located in Dhaka.

Causes of recent garments sector financial crisis

The tremendous success of readymade garment exports from Bangladesh over the

last two decades has surpassed the most optimistic expectations. Today the apparel export

sector is a multi-billion-dollar manufacturing and export industry in the country. The

overall impact of the readymade garment exports is certainly one of the most significant

social and economic developments in contemporary Bangladesh. With over one and a

half million women workers employed in semi-skilled and skilled jobs producing

clothing for exports, the development of the apparel export industry has had far-reaching

implications for the society and economy of Bangladesh.

Causes of foreign investment

Bangladesh is a developing country and globalization integrates us with the global market

in diverse areas. The recent table talks of different formal bodies presumed that

Bangladesh will likely to be equally affected by the global turmoil in the short run as well

as in the long run. It is very difficult to predict the scenario in the long term; however,

short term impacts should duly be taken into consideration. It is imprudent to consider the

economy of Bangladesh as ‘vulnerable’ as US economy which is basically ‘credit

oriented’ rather than ’savings oriented’ that ultimately results in enhancement of debt

burden on individuals and the country as a whole. As a consequence, the economy is

poised towards vulnerability. The above is eventually the outcome of the deregulations of

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the so-called regulated countries. However, in the case of Bangladesh, it is unlikely to

experience such debacle as our regulatory bodies including Bangladesh Bank (BB)

regulates and supervises the financial market strictly. The overall financial leverage in

Bangladesh is low and unlike the global financial institutions, Bangladesh’s banking

system has no toxic derivative engagements that could make overnight default of the

financial sector. Even we don’t have severe liquidity problem that could lead to a credit

squeeze. Moreover, prudential regulations and monitoring by BB has kept the lending-

deposit ratio of private banks within a tolerable limit.

Causes of financial crisis in banking sector

There are three causes of recent world financial crisis in banking sector-

1. Relentless lending of mortgage loans (even to people who would not be able to repay

their mortgages) i.e. sub prime loans

2. Mortgage backed securities

3. Real estate market crash

The incidence of systemic banking crises has risen over the past twenty years and the

costs have been high. Although each country's experience has country-specific factors,

several common elements appear in most crisis countries:

(1) Volatility in the macro economy

(2) The inheritance of structural weaknesses in the economy and financial system

(3) Hazardous banking practices

(4) Hazardous incentive structures and moral hazard within the financial system

(5) Ineffective regulation

(6) Weak monitoring and supervision by official agencies

(7) The absence of effective market discipline on banks

(8) Structurally unsound corporate governance mechanisms within banks and their

borrowing customers.

Causes of such crises are complex and a myopic focus on single factors misses the

essential feature of interrelated and multidimensional causal factors. Although macro-

instability has been a common feature, and may often have been the proximate cause,

27

banking crises usually emerge because instability in the economy reveals existing

weaknesses within the banking system

5.0. Impact of financial crisis

5.1. Impact of the financial crisis among the world5.2. Impact of the financial crisis on Bangladesh

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5.1. IMPACT OF FINANCIAL CRISIS AMONG THE WORLD:

The emerging economic and financial globalization in recent years has been much

more rapid that our understanding of all ingredients associated with this phenomenon of

globalization. As a result, the impact that the current crisis may have on the global

economy is still uncertain, since an adequate theoretical framework for globalization is

still missing. Any evaluation of the possible impact on developing economies should

consider the exiting conditions in the banking sector; the situation in the non-bank

intermediation; the tendencies on foreign exchange markets. The best strategy to cope

with such events is to use the optimal combination of policy ingredients that will

minimize the undesirable effects on the economy. In parallel, the government needs to be

prepared for quick reactions to any new situation.

In the financial sector, creation of government deposit guarantees might be very

useful, together with the suspension of deposits convertibility, and the adoption of an

effective deposit insurance system. Investment plans should be reanalyzed carefully and

priorities should be revised; a revised strategy for attracting FDI is absolutely necessary.

Budget deficit must be reduced considerably, and efforts for passing to a surplus of the

state budget are more than welcome. Measures to reduce the adverse impact of financial

system distress on the real economy may need the adoption of corporate restructuring

programs and debt relief for households. More than the implementation of the right

policies, what it really matters is the speed of reaction of the government. Time for

excessively long consultations is gone; a Crisis Council may be constituted, entrusted

with full power of decision.

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5.2. IMPACT OF FINANCIAL CRISIS ON BANGLADESH:

Bangladesh's economy is expected to grow at a slower pace of 5.6 per cent in the

current fiscal year as the global financial crisis starts to weigh on exports, remittances and

government revenues, the Asian Development Bank (ADB) said in its latest forecast. The

prognosis came in the donor agency's Asian Development Outlook 2009 (ADO 2009)

released Tuesday where the ADB projected a further decline in GDP growth to 5.2 per

cent in the next fiscal year as the effects of the global slowdown continue to weigh on the

economy. Bangladesh was largely unaffected by the first-round fallout of the global

economic crisis, mainly because of the limited exposure of the financial system to

international markets. However, the country is vulnerable to the second round of impacts

of the global slowdown that could come through reduced export earnings, remittances,

which are the main drivers of economic growth in Bangladesh.

The financial crisis that started in the US in March of this year has now turned into a full-

fledged economic crisis that has pushed the European Union, Japan, Hong Kong and

others into recession. There is a saying that when America sneezes, countries around the

world get flu. This has been evident from the fact that the American financial crisis has

left everyone in a state of shock. October 10 was the day when stocks and shares dropped

to the lowest level in US, Japan, Britain and Australia and pretty much across the world.

No country was spared from the financial crisis because of globalization and inter-

locking of financial interests. Some economists have compared October 10 to September

11, 2001 when terrorists attacked the World Tower in New York. Financially 10/10 is the

new 9/11 because the financial system and the money markets will never the same.

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10/10 has dramatically changed forever, according to economists, the global financial

system. Governments have intervened with funds to avoid collapse of reputable banks

and some say nationalization in part of banks was unthinkable during 21st century. But it

has happened in a free market economic system. The crisis is compounded by the fact

that the Bush administration has not been prudent in having a deficit budgets for several

years. It is reported the current budget deficit of the US in this financial year that ended

on October 1st hit a record high to $ 455 billion, partly because of the on-going huge

expenses ($10 billion per month) in the misconceived war in Iraq. (It is noted President

Bush inherited a surplus budget of $79 billion from the Clinton administration).

Furthermore the US regulators have not supervised adequately the way the banks were

providing loans to all kinds of people during the housing- boom period. And the financial

regulatory bodies in the US ignored the warning signs of financial storm since August

2007 and believed that free-market system would take care of it. America with its $13

trillion economy, the world's biggest economy, can absorb and come out of this crisis

after a certain period of time but other countries with much less economies of strength

will suffer heavily (Bangladesh's GDP is around $79 billion dollars). Bangladesh is

captive to what transpires in international markets and economies of leading countries.

Against the background, Bangladesh cannot be immune from the global economic

slowdown and is most likely to be adversely affected sooner or later. Why this crisis? To

put it simply, it has been argued the whole meltdown of the financial system was "Made

In America" for having relaxed rules of providing loans to jobless people with no income

for buying houses, called "sub-prime housing loans" or now known as "toxic loans or

assets" amounting to about $2.1 trillion dollars. Banks and financial institutions that

bought security-paper have lost money. In its latest calculations, the IMF reckons that

worldwide losses on "toxic assets" originated in America will reach $1.4 trillion and so

far $760 billion has been written down by banks and financial institutions. Normally the

banks and financial institutions lend and borrow money and the money market works

well. During the crisis, money markets ceased to function as investors and banks who

ordinarily arrange foreign exchange swaps among themselves for a set time period are

nervous about the risk that their counter-party will go bust because of liability of "toxic

assets" while the swap is being put into place and so have shied away from such deals.

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Thus the global money market was closed and a severe credit-crunch was felt across the

world. If it were allowed to continue further it would have led to depression. How does it

affect Bangladesh? In the industrialized countries, it is reported that manufacturers are

not making money, the retailer is not making money and the consumer is complaining

because they are paying more. An unprecedented gloom in the confidence of consumers

is being experienced in these countries. The global slowdown in the leading economies

such as US, Europe, and Japan is likely to adversely affect principally, in three sectors,

namely exports, aid-flow and foreign direct investment and remittance from workers.

About 75 % of the exports of garments and knitwear go to the US and Europe. The

exports of knitwear and ready made garments to the US and Europe are likely to fall

because there will be no demand in those countries as people would keep money with

themselves for meeting their basic needs during rainy days. Everyone will be tight with

spending money for non-essentials. Bangladesh needs foreign direct investment (FDI) up

to 28% per cent of GDP (almost 415 billion) every year to reduce poverty in the country.

Whatever FDI was coming to Bangladesh was encouraging but it is likely to slow down

considerably.

Likewise the volume of foreign aid and loans to Bangladesh may also likely to be

affected from the industrialized countries. It is noted that during the financial year, nearly

14% of its expenditure of the development budget of Bangladesh relies on foreign aid and

loans. It is reported that remittances during the last financial year stood to almost $7

billion dollars, 25% per cent were from the industrialized countries in the West and 75%

per cent come from the Middle East. The Middle East has not been immune from the

crisis and stocks fell over in the oil-rich countries, even in Dubai. Given the background,

it is likely that remittances will be less because there will be jobs-cut in the countries of

economic slowdown. There is one flip side of the financial crisis in that price of oil has

plummeted to a level, unimaginable this summer. At the time of writing it was less than

$50 dollars, from the highest $147 dollars per barrel. That would enormously help

Bangladesh which imports oil. Suggested steps against the background, private sectors

are likely to shed employees in the country and as a result, unemployment is likely to

increase in the country. The government's principal aim is to keep unemployment in

check. Many economists suggest that one of the ways to keep unemployment at bay is to

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spend money on infrastructure with the benefit of enhancing employment and ultimately

increasing productivity. Second, purchasing power must be increased to vulnerable

groups by directly giving money or food for works so that their basic needs are met.

Furthermore new business friendly policies may be adopted to attract foreign investment

and a cut in interest rate by Bangladesh Bank is an option to be considered to boost

investment by private sectors. Real estate developers and garment manufacturers may be

given more incentives in cutting taxes and customs duties in importing raw materials so

that engine of growth is maintained. Bangladesh seems to be in unchartered territory

because such global economic crisis has never occurred before. It is qualitatively

different from earlier economic break down in 1987 and in 1997 in South East Asia.

Bangladesh's economic security is likely to be threatened. No one can be sure what lies

ahead for at least two years. It is commendable that the government has set up a task

force with local think-tanks and private sectors as to how to address slowing economic

growth in the country. The volatile situation is both a challenge and an opportunity for

Bangladesh to show innovation and creativity to come out from the likely adverse effects

of global economic crisis.

Impact of financial crisis on share market

The global financial crisis is only 25% complete, says a recent study by one of the

world’s biggest hedge funds. A study by Bridgewater Associates estimates that total

credit crisis losses will amount to $1.6 trillion worldwide. A far cry from the nearly $400

billion lost already. The people at Agora Financial certainly seem to think so and that is

reportedly what Bridgewater Associates seem to be predicting. "The fund’s call was

based in particularly simple reality bean counters at Bridgewater estimate financials

handle around $26.6 trillion in debt-based assets. If such assets were valued at today’s

market rates, around $1.6 trillion would be instantly lost. ET voila Bridgewater thinks

we’re only a quarter of the way through. "Thus, we’ll join with Agora Financial to tack

on another prediction onto their “write-down rundown.”

Impact of financial crisis on manufacturing industry

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There are many factors that cause global economic crisis. If one believes in free

markets then, it is said that institutional polices that attempt to exploit the market can

cause serious fluctuations on the global scale. According to most "free market" theorists,

the market is an exchange between two constituents, who agree on a price without of

need of an "arbitrary agent". This creates a natural supply and demand defined by their

agreed price. The situation that occurs is that this model is affected by economic events

such as weather; availability of resources, institutional policies and technology, which all

can be either positive or negative. For the case in point, let's say that there is an arbitrary

agent who decides to charge a fee for conducting an exchange for six individuals (this

example could be substituted for any of the mentioned economic events uniquely

affecting the price). Each of the three pairs would have a supplier and consumer. Let us

also suppose that 2 out of the 3 pairs can afford to do business but one of them cannot

due to this fee. This would thus create an inefficient market. On a global context, if we

were to have this model to represent the sum of all markets, the 2 pairs that can afford to

do business would be all functioning markets and the one that cannot would be the

market failures influenced by the arbitrary agent which can be viewed as all ineffective

economic policies. In a sense, a global economic crisis is the occurrence of market

inefficiencies due to economic events.

Impact of financial Crisis on travel Industry

The travel industry is influenced by the crisis in the economy worldwide. The

soaring price of crude oil led to increased cost for airlines, trains, cruise lines, and bus

lines. The travel industry had no option but to pass on their increased costs to consumers

in the form of higher ticket prices. This was at the same time that consumers had less

discretionary income for travel. Even though the price of oil has dropped tremendously,

the airlines still predict multi-million dollar losses in 2009 due to the expected three

percent drop in passengers. Because of the banking crisis, carriers who were having

financial difficulties have been unable to get the credit necessary to weather the economic

storm. The British travel industry began to feel the impact when tour operator travel

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scope and carrier MAXjet Airways collapsed at the end of the year in 2007. This

illustrates one consideration that travelers have when making reservations: is the carrier

going to be in business still when it's time to travel? Many travelers are postponing

making arrangements until the last minute, hoping that they will get a deal on last-minute

fares, and ensuring that the carrier will be in business.

Impact of financial crisis on food sector

Spiraling food prices have pushed an estimated four million Bangladeshis below

the poverty line despite the country's strong economic growth. "Food price inflation has

caused enormous hardship in Bangladesh by eroding purchasing power of the poor”.

"Four million people have been pushed back into poverty this year because of rising food

prices." Strong economic growth between 2005 and 2008 was expected to reduce poverty

in Bangladesh by five percent -- from 40 percent to 35 -- but projections had been scaled

up to 38 percent because of the higher prices. "If there was no food crisis, the poverty

numbers would have looked very different in 2008.” The figures were compiled using the

definition of poverty as those living on less than a dollar a day. In its annual report,

issued this week, the Consumer Association of Bangladesh said the price of food and

other essentials had risen 45.5 percent in the past year. The latest data reported inflation

at 10.14 percent for the month of June. However, many financial experts say the actual

figure is about 20 percent. "Increasing productivity is the only option where every year

over two million people are added to the population, while the availability of cultivatable

land is decreasing by one percent.” Bangladesh, which has a population of 144 million, is

one of the world's poorest countries. It is building a stock of 2.5 million tones of rice this

year to protect the country from natural disaster or further global price hikes.

Impact of financial crisis in banking sector

35

By allowing banks to open new branches & set up ATM machines without taking

prior permission of RBI leads to the development of the banking system in Bangladesh.

As our 70% of the population resides in rural Bangladesh, it is beneficial for both the

banking industry & the public at large.

Impact of financial crisis on remittance

Remittance inflows have recorded a 34 percent rise in the first five months of the current

fiscal year, which runs counter to the World Bank's gloomy forecast about the money to

be remitted by Bangladeshi workers abroad. From July to November, Bangladesh

recorded $3.75 billion in remittances, up from $2.80 billion in the year-earlier period.

Remittance inflows increased to $767 million in November, recording a rise from $648

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million a month ago. The remittances in November followed a usual upward curve,

driven by the rising inflow of money ahead of the Eid-ul-Azha in December. In October-

November of the last fiscal year, the country recorded $559 million and $617 million

respectively, according to the data provided by the central bank. In a recent press briefing

on "Global financial crisis and its likely impact on Bangladesh", the World Bank said the

current fiscal-year remittances are likely to fall by 20 percentage points from fiscal 2007-

08. For the current fiscal year, the WB projected remittances at $9.2 billion, which means

16.8 percent growth. In the worst-case scenario, the figure will hover around $8.9 billion

with 12.4 percent growth. Last year, the remittances were recorded at $7.9 billion with a

32.4 percent rise from a year ago. In the current fiscal year, an additional eight lakh

migrant workers were projected to go abroad, but the figure may come down to two to

three lakh in the worst-case scenario, according to a forecast by the WB. Officials with

Bangladesh Bank said about 80 percent remittances of Bangladesh come from Middle

Eastern countries. "The remittance flow is still okay. There are no signs of an adverse

impact of the global financial crisis on remittances," one of the officials said. The BB

official also said oil prices had dropped substantially in Middle Eastern countries, eroding

their income. The remittance inflows show the negative impact of the falling oil prices is

yet to be felt in their economies. Exports also showed an upbeat trend. In the July-to-

September period, exports showed 43.39 percent growth from the same period a year ago.

But the World Bank forecast that the export growth might fall 4.3 percentage points this

fiscal year. According to the WB projection, exports will earn $16 billion this fiscal year,

with 13.1 percent growth from a year earlier. In the worst case, export earnings may slow

to $15.7 billion with 11.6 percent growth. In the last fiscal year, the exports were worth

$14.1 billion with 15.9 percent growth.

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6.0. Findings

6.1. Key findings of the report

38

6.1. KEY FINDINGS OF THE REPORT:

During the time of preparing this report we find that the negative impacts of

global financial crisis are beginning to show on the increasingly globalizing economy of

Bangladesh:

Bangladesh’s export growth rate experienced has turned negative.

Export of non-apparels items has seen a significant deceleration .

Depreciation of currencies by competing countries ranging from 6-30 per cent

over the last one year and their stimulus packages that provide wide ranging

incentives to export-oriented sectors, have led to erosion of Bangladesh’s

competitive strength in the global market

Remittance earnings could be adversely affected in near future as number of job-

seekers going abroad halved as some countries have either revoked earlier job-

contracts or have stopped issuing new visas.

The adverse affects are likely to have negative implications for GDP growth,

labor market and consequently attainment of poverty alleviation targets and

MDGs by Bangladesh.

There are clear indicators of weakening macroeconomic performance.

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7.0. Recommendation

40

7.0. RECOMMENDATION:

We all know that a financial crisis is going on all over the world. So, from

businessman to general investor everyone is worried about it. But this crisis period will

not remain same, everyone will overcome it. But now what you need to know is how you

can manage your business & keep the consistency in this competitive market. So, in this

post I am trying to tell some possible ways to overcome this crisis. It may helpful for you.

This is not a right time for the new investor; wait for sometime while the market

will become stable.

Stay focused on the long term, It is very important.

In this crisis keep the good relation between you & your employee for mental

support.

Try to use every possible communications channel.

Before taking any financial step, just look into its authentication.

If customer service you are providing be smart about your customers.

Don't go for any finance related projects which may increase your financial

pressure.

Try to estimate very professionally before investing.

Make a budget of your minimum expenses also.

Don't miss to pay the monthly installment to recover your debt (If you have).

Try to avoid taking credit from any non government financial organization.

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Keep avoids providing credit to any other person (But keeping a good relationship

with everyone).

Bibliography

We collect data form many sources. We use-

Internet

www.google.com www.wisebread.com www.wekipedia.com

www.bangladeshjournal.com

Newspaper Magazines

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