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ANALYSIS

What the future holds for us

'Political Bank' Bonanza

Inam Ahmed
It is a curiously motley band of people, all vying to be bank owners. A former president and dictator, a young lawmaker, a not so young lawmaker, a retired bureaucrat turned politician, an income tax lawyer, and what not. Suddenly Bangladesh has a bonanza of banks.
In the shadow of that bonanza lurks the possibility of great distress and surprise. Take the process of giving licence first. The amended Bangladesh Bank Order of 2003 made a significant difference in the process of giving licence. Before that it had clearly been written that the government would issue directives from time to time to give bank licences. This had laid the foundation for putting politics first rather than finance and economy in considering new banks. But then the amendment of2003 changed this ball game and empowered the central bank's board as the sole authority to consider new banking licences. This was supposed to stop political interference in banking.
This 2003 amendment also had a history. When the Awami League government came to power in 1996, it suddenly gave new banking licences to its party people. There was a lot of hue and cry from the wiser heads and multilateral donor organisations. And so the move was taken to stop political power play.
And the same Awami League came to power again, after a gap of seven years, and again it put on a repeat show of bank proliferation. Already nine banks have been allowed, and it is being heard that three more are in the pipeline.
This government had been putting pressure on Bangladesh Bank from the beginning to allow new banks for its party people. This is why the central bank prepared a position paper on whether the economy permits new banks at this moment. The bank's view was in the negative. The central bank board also supported this view. And yet pull of the string was so hard that the decision was made to allow new banks despite strong opposition from four board members. And in the
process, the Bangladesh Bank Order was violated.
Now let's analyse why it is not good to allow any more bank at this moment. The 47 existing banks had a deposit of Tk 448,000 crore and advances of Tk 364,300 crore in December. The four state-owned banks alone had the highest of 26 percent deposit. The 30 private banks shared among themselves 62 percent of the deposit. But that does not reveal the full picture. Islami Bank actually holds the lion's share. This means the rest of the private banks are operating on very thin deposit. And all of them are now plagued by liquidity crisis.
So allowing more banks is oxymoronic. The new banks will be in the fray for a bite of this same thin slice of deposit, making it even thinner and unviable to keep the banks going. And then a situation will arise where the general theory that more players mean more competition and benefit for the customers will not work. Rather the banks will be in an unhealthy competition to pool deposit at high interest rates. This will mean their lending rates will be higher too. And as a whole, the borrowers will be the losers. Investment will be hurt.
Allowing of more banks also brings to the fore the burning issue of supervision. The central bank does not have the manpower and capacity to supervise so many banks. So horrendous banking practices might reappear without the watchdog noticing it at all, jeopardising the whole financial system with toxic loans and cronyism.
How will these new banks run? Where is the manpower? Already salary in the banking sector is among the highest. The influx of new banks will create a deep crisis of quality bankers, and that will lead to substandard banking too.
And how will the profitability of the banks look? The central bank has recently identified eight banks which actually did not make any profit and yet declared dividend on claimed false profit. All these banks were allowed on political grounds. This only shows that the depressing global and domestic situation is already taking a toll on banks. And the rot has started. Instead of trying to stop its spread, the central bank has allowed new banks, fast tracking the decay.
The central bank carried out a stress test of the banks at three levels — mild, moderate and severe. It was found that in case of a major shock,
half the banks will lose half their capital. Citibank NA also failed such a stress test in America. These only show the vulnerability of the banking system at this moment.
Here one should consider the current financial governance structure. During the last BNP regime, we had a strong finance minister like Saifur Rahman who was unwavering about financial discipline in the banking sector. We had a strong gov-ernor like Fakhruddin Ahmed, and we had a strong Securities and Exchange Commission chairman in Mirza Azizul Islam. It only takes to ask the stakeholders about how the present governance structure compares with the one during the BNP regime. A weak structure matters when new banks are allowed in the market.
Why then all these people rushed to get banks? This is a big question, and probably the answer is known too. Big money is said to have changed hands in the process of getting bank licences. Three years down the line, the directors can sell their shares to some other persons and make money.
Now that is a smart financial proposition. Only that it is devoid of any banking element in it.