[🇧🇩] Banking System in Bangladesh

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Banking sector reform hinges on resolving political issues: experts

Economists and experts on Friday said that current problems of the financial sector could not be resolved without addressing the underlying political problems, as economic outcomes were connected to the...

www.newagebd.net

Banking sector reform hinges on resolving political issues: experts
Staff Correspondent 30 August, 2024, 22:07

Economists and experts on Friday said that current problems of the financial sector could not be resolved without addressing the underlying political problems, as economic outcomes were connected to the country’s political settlement.

At a webinar titled ‘Eviction of Influence in the Banking Sector: Will It Alleviate the Misery?’ organised by Forum for Bangladesh Studies, experts blamed bad politics and poor governance as the root cause for severe crimes and corruption within the country’s banking sector.

Abdul Mannan, former managing director of Islami Bank, said that on January 5, 2017, he was taken by intelligence officials and coerced into signing his resignation letter.

He alleged that the resignation letter, signed under pressure, was written on an unused pad from Islami Bank, which had not been used since the bank’s establishment in 1983 up to the present year, 2024.

The controversial S Alam Group forcibly took over Islami Bank on January 5, 2017.

He said that officials from the Bangladesh Bank worked late into the night to expedite the change of ownership of Islami Bank on that very same day.

He questioned how such practices could be tolerated in a country’s banking sector, which was crucial to the economy.

Mannan also noted that in the following years, the Bangladesh Bank overturned many decisions over phone with the influential business group.

He called for actions to prevent such occurrences in the future, emphasising the need for stringent measures and supervision to ensure that similar coercive and irregular practices do not happen again.

Mannan said that independence of the Bangladesh bank was crucial to overcome the crises of the banking sector.

‘I am optimistic that if the central bank remains independent and if managing directors of banks are freed from control of board of directors, the sector could reach new heights within a year,’ he added.

Mannan, who lived seven and a half years abroad and recently returned to the country after the fall of the Awami League government on August 5, said that he was fearful whether or not he would be able to breathe freely upon his return to Bangladesh.

‘I now feel that I have the freedom to speak, but overcoming that fear will take time. I need more time to truly breathe freely,’ he said.

Mamun Rashid, chairman of Financial Excellence, said that the S Alam model had thrived in the banking sector due to deficiencies in good governance and the existing financial sector problems would not be solved without addressing the political problems

Good governance in the banking sector cannot be achieved without ensuring overall accountability throughout the country, he said.

Mamun stated that there were instances where a large amount of loans was disbursed to the S Alam Group in the morning, and by evening, the money had been siphoned out of the country through hundi.

The economist said that there were numerous allegations of large cash withdrawals from banks under S Alam’s control after banking hours, but none of these allegations were investigated.

He also alleged that a former deputy governor of the Bangladesh Bank, SK Sur Chowdhury, was responsible for facilitating influential figures in siphoning cash out of the country from the banks.

Rashed Al Mahmud Titumir, development studies department professor at the University of Dhaka, said that transparency of institutions and organisations largely depended on political settlement of the country.

He said that it was widely known that there was a huge amount of bad loans in the country but there was no scope to know the real figure due to manipulation exercised by regulatory authorities.

Titumir demanded that a forensic audit be conducted in the banking sector to know the real picture of bad loans and who were involved with the process.

Describing the state of the banking sector ‘worse than a severely ill patient,’ he said that protecting the interests of depositors and small and medium entrepreneurs should be central to the sector’s reforms and reconstruction.

‘It is crucial to establish the principle that depositors are the owners of banks. Otherwise, the aspirations of martyrs of the student-led mass uprising will not be realised,’ Titumir said.

He also emphasised the need for implementing financial sector reforms with consideration of Bangladesh’s specific context.

Titumir recommended establishing an Islamic banking wing within the Bangladesh Bank, which should operate in accordance with international standards.

Badiul Alam Majumder, secretary of Shushashoner Jonno Nagorik, held unethical politics responsible for the fraud and corruption in the banking and financial sectors.

Political motives and directives were behind the takeover of Islami Bank, as politics was serving the interests of specific groups rather than the well-being of the public, he said.

Badiul Alam mentioned that the ousted government faced a legitimacy crisis due to holding controversial elections.

Due to the legitimacy crisis, the outgoing government created crony groups, which have since taken over financial institutions, he said.

Badiul Alam mentioned that the situation would not improve unless the right leadership was elected through proper elections.​

 

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The renaissance of Bangladesh Bank and some expectations

We hope that the BB governor will continue the momentum and spirit to bring order and promote the economy.

www.thedailystar.net

The renaissance of Bangladesh Bank and some expectations
We hope that the BB governor will continue the momentum and spirit to bring order and promote the economy

ILLUSTRATION: BIPLOB CHAKROBORTY

The newly appointed Bangladesh Bank (BB) governor, Dr Ahsan H Mansur, has effectively started the reformation of the country's banking sector without delay. This is most hopeful as it has long been overdue. The new governor, being a strong proponent of macroeconomic governance, started his day with the bitterest task of swooping down on the top financial hooligans who simply emptied the banking sector through a wholehearted pairing with corrupt politicians in power. An objective assessment of what is happening at the central bank heralds the advent of a dark chapter for the oligarchs who plundered both the capital market and numerous banks simultaneously under the interest of the past rulers.

What the governor has kicked off is no less than a renaissance since his actions have begun to storm the castles and forts of the economic mafia who never thought of being caught red-handed because they governed the government. His prime actions endorse the importance of correcting institutions before talking about theoretical aspects. Dr Mansur is a sound pro-market economist who has equal respect for Smithian ethical doctrines, and he has not deviated from that: his market-based rules for exchange and interest rates are a testimony to that. He has remained different from his predecessors by signalling to the market that he will go after the money launderers and bank looters before fixing theoretical macro irregularities.

The revival of Bangladesh Financial Intelligence Unit (BFIU) is also a significant move. BFIU was like a cat without teeth under the two previous governors, while the Anti-Corruption Commission (ACC) was like an anaemic tiger without claws. Both the institutions are prerequisites for the well-functioning of Bangladesh Bank. The political domestication of both BFIU and ACC impeded BB's desired actions in many regulatory aspects. The judicial tardiness of default litigations at higher courts eventually made BB dysfunctional as a financial regulator. That is why many economists advocated for BB to have some magisterial powers to punish the wrongdoers at its own discretion.

The political domestication of both BFIU and ACC impeded BB's desired actions in many regulatory aspects. The judicial tardiness of default litigations at higher courts eventually made BB dysfunctional as a financial regulator. That is why many economists advocated for BB to have some magisterial powers to punish the wrongdoers at its own discretion.

Although the new BB governor has infused blood into the BFIU, pairing with the ACC or higher courts remains beyond his capacity. And that bureaucratic labyrinth will again give refuge to the wrongdoers when the next elected regime begins. The time has come to make some reform so BB can complete the task of judgement and punishment within the financial regulatory framework. Going to the ACC or courts for straightforward financial verdicts is just a waste of time and energy—a rigmarole which eventually helps the culprits. This injustice induces new entrepreneurs to default wilfully since dishonesty pays better. People want an end to this culture to make the banking system fair and self-propelled. We believe the banking commission, which is presumably under construction, will figure out what to do in this respect to remove the trap of judicial bureaucracy.

The institutional damage done by the immediate past BB governor, who was forced to resign after the collapse of the Awami League regime, may be vast quantitatively, but qualitatively it is perverted and infectious. The lax rules he endorsed for the loan delinquents—such as getting rid of the stigma as a defaulter by only adjusting 5-10 percent of defaulted loan—are hard to reverse. The past governor, a retired bureaucrat with no background in economic scholarship but noted as a lobbyist, endorsed a Chattogram-based business group to engulf a couple of banks, as the BB has recently revealed.

The new governor's day dawns with the fight against that vicious conglomerate, which syphoned off millions of dollars from their possessed banks through terrible malpractice and the judicial impunity of the past government. This crusade will give the Bangladesh Bank a tough time. Economists who believe in ethics and politicians who respect minimum fairness must stand beside the new governor so he can bring some semblance of order in the country's banking system and punish the culprits by seizing their assets to adjust for their thefts. He wants to treat the cancer first before giving vitamins to the patient. And that makes him different from other policymakers.

We hope that the BB governor will continue the momentum and spirit to bring order and promote the economy. The prime objective of the central bank is to maximise employment and growth subject to maintaining a moderate level of inflation. The governor should require the banks to report their internal employment figures as well as annual profit figures. The banking administration will remain half-broken if the Financial Institutions Division (FID) at the finance ministry is not eliminated. The pay structure at banks is highly hierarchical and unfair. That must be addressed too. The interim government should appoint a competent leader at the competition commission, which is another example of a domesticated species with a retired bureaucrat at its helm. Institutional leadership must be merit-based, not just qualified for clerical work with unquestionable obedience.

Finally, Economic Adviser Dr Salehuddin Ahmed and BB Governor Dr Ahsan H Mansur must step in a highly measured way to form the banking commission, which will delink political clout from banking affairs for the sake of establishing a corporate culture so the financial sector can see some light at the end of the tunnel. To make it happen, the governor's position must be made constitutionally powerful to strike the final note of the renaissance.

Dr Birupaksha Paul is a professor of economics at the State University of New York at Cortland in the US.​

 

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Fixing our banks, building a more robust banking system

With the right solution mix and proper political resolve, Bangladesh can come out of this predicament with a far better foundation for future growth

en.prothomalo.com

Fixing our banks, building a more robust banking system
Tawhid Ali
Published: 06 Sep 2024, 09: 42

The Bangladesh BankFile photo

When asked why he robbed banks, the famous American bank robber, Willie Sutton, famously quipped “because that’s where the money is.” It seems that many of our leading business leaders have adopted a similar mindset over the past fifteen years. Regrettably for our nation, they have become alarmingly adept at robbing banks.

The Bangladeshi banking system is in a precarious situation. The causes of this predicament are well-documented by various analysts (Centre for Policy Dialogue has produced several well-researched presentations). There is a consensus on how we arrived at this juncture and the magnitude of the issues we face. There is also an agreement that reforming our banks and regulatory framework is crucial since banks are the primary source of credit in our economy, and without an effective credit system, our economy cannot function.

As a Bangladeshi citizen with significant experience in financial markets in New York and London, I wish to share my perspective. We should not panic. Fortunately, the problems faced by Bangladeshi banks are not unprecedented and compare favourably to crises I have witnessed elsewhere. We will need an audit to get a true picture, however various sources put the country’s NPL ratio at around 10-15% of total loans outstanding. So even if we were off and NPL were to double to 30%, that would be lower than situations I have faced (for example, Ukraine banks’ NPL ratio reached over 50% in 2018, Greece’s NPL ratio also exceeded 50% in 2015, Turkey peaked at 30% in 2000). There are multiple solutions to this mess. My confidence stems from my two-decade career in finance, during which I observed numerous global banking crises.

Young people today may not recall that our global financial system nearly collapsed fifteen years ago. During that time, developed economies like the US, UK, Germany, Ireland, Spain, Portugal, Greece, and Iceland had to bail out their banks and reassess their banking regulations. Each country had similar options but chose different paths based on political feasibility and philosophical leanings. Some took longer than others. Some solutions worked better than others.

In all situations, banks were adequately recapitalized, bad assets disposed of, and regulations changed. In some cases (like the US, UK, Ireland, Germany, and Iceland), economic growth returned, and the size of the economy today is larger than it was pre-banking crises. But in other situations (Italy, Spain, and Greece), the economy remains much smaller than it was before the problems. I believe with the right solution mix and proper political resolve, Bangladesh can come out of this predicament with a far better foundation for future growth.

We will need to create a robust independent bank regulator to prevent politically connected individuals from securing excessive loans

Here are some lessons I’ve learned that could be particularly relevant for Bangladesh:

1. Government intervention is necessary but can be “light-touch” with multilateral agency assistance. Some countries even profited from intervening in troubled banks (although that sounds pretty optimistic in Bangladesh’s case right now).

2. Fixing the banks' capital structure is crucial. A thorough audit of each bank will help understand their true state and how much capital is needed. To the extent feasible, banks should be given the opportunity to raise this capital in private markets. The Government can come in as a provider of last resort and its terms need to reflect that.

3. Weak banks should be wound up. Their productive assets can be taken over by relatively stronger banks, leading to increased concentration initially but solvable later with the granting of new licenses.

4. We should establish an asset management company (AMC) to handle troubled assets independently. The government can provide the equity needed for the AMC and can provide guarantees; however, the AMC needs to be able to act independently and within the current judicial system to work out the troubled assets. AMCs are not guaranteed to succeed when systems have high levels of troubled assets; however, in the right circumstances, they can help solve much of the problem without significantly burdening public finances.

5. We will need to create a robust independent bank regulator to prevent politically connected individuals from securing excessive loans. We need to remember that our banks did not get into trouble because they were being greedy or acting imprudently. Our solution space needs to acknowledge that as an emerging economy, our banks will always face political pressure to lend, so our regulatory framework needs to develop with an eye towards curtailing that. We also need to tread carefully here as there can be many unintended consequences for poor regulations. If we come down too hard on the banks, they will not lend, and our economy will suffer.

Finally, while its outside my immediate area of expertise, I believe we will need to enhance Bangladesh’s legal framework to facilitate a distressed asset market. Banks will always extend and pretend if the regulators allow them. Creating an effective mechanism for private parties to come in and take the troubled assets off the banks' balance sheets will be essential going forward.

Defaulters have gotten away in Bangladesh for decades. We need to put a stop to that. I am optimistic that we can.

* Tawhid Ali is a global public markets equity portfolio manager with over two decades of investing experience. He was Chief Investment Officer at Alliance Bernstein (AB) and a management consultant with McKinsey & Company.​

 

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Global lenders to finance banking reforms

The Asian Development Bank (ADB) and the World Bank are expected to provide funds to Bangladesh for banking sector reforms, including strengthening and modernising the central bank.

www.thedailystar.net

Global lenders to finance banking reforms

The Asian Development Bank (ADB) and the World Bank are expected to provide funds to Bangladesh for banking sector reforms, including strengthening and modernising the central bank.

The decision came following two separate meetings at the Bangladesh Bank (BB) headquarters on Monday between central bank officials and delegations of the ADB and World Bank.

The ADB is likely to disburse $1.3 billion towards Bangladesh's efforts to reform the banking sector and modernise the BB, central bank officials who attended the meetings told The Daily Star.

They added that the fund is likely to be distributed across three years, with $500 million coming in the first year, $500 million in the second year and $300 million in the third year.

They further said the World Bank is likely to disburse $400 million for banking reforms, including modernisation and capacity-building of the central bank.

The World Bank delegation wanted to know more about the planned banking reforms, so central bank Governor Ahsan H Mansur described the initiatives to them, according to the officials.

The ADB delegation met with the central bank's Financial Sector Support and Strategic Planning Department, but other senior officials were also present at the meeting.

On the other hand, the World Bank delegation met with the central bank governor while senior officials from the Banking Regulation and Policy Department, and the Department of Offsite Supervision were present.

Contacted, Md Habibur Rahman, deputy governor of the central bank, told The Daily Star that the ADB and World Bank would provide technical and other required support to reform the banking sector.

After joining as central bank governor, Mansur, a prominent economist, has moved swiftly to reform the banking sector, which became plagued by irregularities and scams during the previous government's rule.

The central bank has already reconstituted the board of directors of 11 banks.

When the Awami League won the first of four consecutive elections in 2008, non-performing loans in the banking sector stood at Tk 22,480 crore.

By the end of June this year, the amount had soared to over Tk 200,00 crore, accounting for over 12 percent of total disbursed loans in the banking system, as per Bangladesh Bank data.​

 

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