Derivative Use by Commercial Banks in Bangladesh

Derivative use by commercial banks operating in Bangladesh is hypothesized to improve their intermediary functions. The study outcome identifies the influence of derivative use on the growth of advances by commercial banks. Bank’s participation in advances increases with increase in hedging activities through futures. It has also been found that the Bangladeshi private sector commercial banks have a high exposure of risk and have externalized their risk management process. Specialized banks of Bangladesh have a low risk exposure level, but still they have moderately externalized their risk management practices. Bangladeshi public commercial banks have a large deposit base and high risk exposure but are still internalizing their risk through risk management. The policy implication of this study is that derivative use by commercial banks is likely to increase the intermediary role of banks, i.e., the increase in advances growth rate rather than investment portfolio growth rate. Commercial banks with large deposit base could gain relatively by externalizing their risk management practices since this study reveals that interest rate risk exposure of derivative users is statistically lesser than non-users.