The financial sector must play a crucial role in achieving higher productivity by improving allocation of investment funds and strengthening the incentive framework and eventually in increasing employment. The major function of a financial system is to strengthen the savings-investment process of the country.

The financial sector in Bangladesh comprises the money and capital markets, insurance and pensions, and microfinance. Bangladesh changed the policy from state control to a relatively market-based open economy by adopting a major stabilisation, liberalisation and deregulation programme under the influence of the World Bank and the IMF against the backdrop of serious macroeconomic imbalances in the early 1980s. The government launched a formal financial sector reform program in 1990.

Banking alone accounts for a substantial share of financial sector assets with about 60 banks accounting for about 90% of the sector's total assets. The high deposit and lending rates are a reflection of the system's embedded inefficiencies. The total annual cost of banking subsector inefficiency is estimated at about 1.2% of GDP. General and administrative costs in commercial banks amount to 3.1% of net assets, or 0.6% of current GDP, exceeding the international norm. The Donors has estimated that the aggregate cost of inefficiency of banks, DFIs, and specialized banks in Bangladesh is estimated at over 1.4% of GDP.

The banking sector has been heavily burdened by high levels of nonperforming loans (NPLs) which have accumulated over many years due to weak management of the SCBs.

The donors carried out a review by Price Waterhouse (Australia). Government set up a committee in 1983 to review the problem of debt default and report of both Price Waterhouse and it recommended for the reform and restructuring of the FIs. The Donors like ADB, World Bank etc signed an agreement with Government for improving the default loan situation suspended further disbursement of loan until reform of FIs completed. The policy makers realized the gravity of crisis upon restriction of Donor agencies on loan disburment.

The capital market-the market for trading long-term debt and equity securities, consisting of primary and secondary markets-remains underdeveloped, despite recent improvements.

The country's insurance premium per capita was only 2.5% in 2004, compared with 4.0% in Pakistan and 19.7% in India. Penetration (in terms of premiums as a percentage of GDP) remained very low in 2004: only 0.6% for Bangladesh, compared with 2.9% for India and 0.6% for Pakistan. General insurance is provided by 44 companies and life insurance is provided by 18 companies.

The government provides a compulsory pension scheme for its staff. There is no such provision in the private sector service rules of companies or corporate bodies.

Microcredit has been quite successful in raising the income of the poor and lowering overall poverty; however, there are limitations. There is a controversy over management and some activities of Grameen Bank.

Reform in financial sector is an inevitable and continuous process when the existing structures cannot fulfill the desired level of economies of scale in operation. The program should contains legal, policy, and institutional reforms to improve the process of financial intermediation.