Liquidity crisis: an empirical evidence from the financial sector in Bangladesh

Abstract

Liquidity crisis is a very important topic for the financial industry of the world and recently in 2017-2018 fiscal year Bangladesh has faced this crisis. Even though the signs were visible from mid-2017, but by the end of 4th quarter, the crisis became visible as the financial institutions were unable to lend and also there were some incidents where the banks could not honor the cheques. The crisis was caused by a few factors. The reasons include, increasing non-performing loans due to aggressive lending, bad governance, and decreased remittance, increased import against export, government borrowing and increased investment on national saving certificate. The crisis also had huge impact on the financial sector of the country. Due to the crisis, the deposit rate, call money rate increased significantly which in turn increased the lending rates. The Bangladesh Bank also took necessary steps so that the crisis is not prolonged. Bangladesh Bank, reduced the CRR, restructured the ADR, instructed the state-owned banks to put money in private financial institutions. Right now, the sector is crisis free but the impact the last crisis has on the economy is visible. The current situation is not sustaining long as after a certain political situation changes, people might find their way back to investment rather than saving money in the bank in a low interest rate.