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End political influence on the banking sector
The banking industry of Bangladesh is going through a critical period marked by significant challenges, including the largest amount of non-performing loans (NPLs) ever, extreme liquidity problems in stressed banks, capital flight through trade-based money laundering, a substantial lack of corporate governance, provisioning shortfalls, and a foreign currency crisis. The ongoing crisis has been caused by the last one and a half decades of grand-scale deviation of governance in the banking industry. Since inception, the Bangladesh Bank has issued licences to 62 scheduled banks (including six state-owned commercial banks, three specialised banks, 43 private commercial banks, one digital bank, and nine foreign commercial banks) and 34 non-bank financial institutions. However, there is a controversy regarding whether the size of the economy can sustain so many banks. In this context, unipolar decisions made by different political regimes, without considering the sector’s sustainability, are primarily responsible for the current crisis.
If we look at other Asian countries, in Malaysia, there were 42 banks operating against a GDP size of $399.71 billion in 2023. In Indonesia and Thailand, the numbers are 106 and 30, respectively, against GDP sizes of $1,371.17 billion and $514.97 billion. Similarly, India has 95 scheduled banks with a GDP size of $3,567.55 billion. In Pakistan, the number of banks stood at 41 in 2023, with a recorded GDP size of $337.91 billion. Meanwhile, in Bangladesh, there were 62 banks in 2023, against a GDP size of $437.42 billion. Similarly, Myanmar has 48 banks against a GDP size of $66.76 billion. Myanmar and Bangladesh have the highest numbers of banks with respect to their GDP sizes in the South-Southeast Asian region.
Since Bangladesh’s independence and its transition to an open market economic system through trade liberalisation (1971-1990), the banking industry experienced a slow pace of growth. However, after globalisation and the advent of technological advancements, the industry gained momentum. After the independence, the banking industry started its journey with six nationalised commercial banks, three state-owned specialised banks, and nine foreign banks. In the 1980s, the sector saw a significant expansion with the launch of private banks, starting with the licensing of the Arab-Bangladesh Bank Limited in 1981. The Awami League-led government approved the licence of 26 private commercial banks throughout their entire tenure, while the BNP-led government licensed eight banks, and nine banks were approved under other governments.
Issuing licences for banks under political consideration has caused a significant havoc in our banking industry. Previously, the minimum paid-up capital for a bank licence was Tk 400 crore, which has now been raised to Tk 500 crore, paid in white money by the directors. If a bank has assets worth Tk 20,000 crore, it effectively generates 40 times more assets than the paid-up capital injected by its real owners. It is the prime responsibility of banks to safeguard public money rather than prioritise loaned clients. When a bank licence is granted to a politically affiliated individual who assumes the role of a director or chairperson of the board, and that individual simultaneously holds a legislative or cabinet position, they can influence the bank through state mechanisms, often overriding even the central bank’s regulatory norms. Such a scenario creates an extreme conflict of interest, undermining the bank’s ownership structure, corporate governance, and management integrity. Furthermore, due to the lack of strong demutualisation in banking, the board of directors often interferes with the bank management’s decision-making, ultimately undermining professional governance. Over the last one and a half decades, a significant number of banking professionals have left the profession prematurely due to this lack of professional freedom.
According to a World Bank report titled Bangladesh Development Update (October 2023), the total of NPLs, rescheduled loans, and outstanding written-off loans rose to nearly Tk 3.78 lakh crore by the end of 2022, compared to Tk 3.14 lakh crore in 2021. The report also shows the stressed asset ratio (including NPLs, rescheduled loans and written-off loans) to be 20.5 percent in 2018, 24.2 percent in 2019, 23.6 percent in 2020, 23.1 percent in 2021, and 22.8 percent in 2022. Very recently, the White Paper on the State of the Bangladesh Economy revealed that the total amount of stressed assets stood, as of June 2024, at Tk 6.75 lakh crore. It includes recognised NPLs of Tk 2.11 lakh crore, rescheduled and restructured loans of Tk 2.73 lakh crore, outstanding written-off loans of Tk 75,389 crore, special mention accounts (SMA) worth Tk 39,209 crore, and loans under court stay order worth Tk 76,185 crore.
In Bangladesh, over the last decade, there has been a troubling practice of bank directors sanctioning loans for their own business ventures, prioritising personal interests over the bank’s interests. The board of directors, which holds the highest authority to approve loans in a bank, has often been involved in such conflicts of interest. The Chattogram-based S Alam Group, for example, has reportedly exercised exclusive controls over six banks, one insurance and one NBFI over the last decade. Through this influence, the group allegedly diverted Tk 2 lakh crore from the banks under their control by creating shell companies or falsifying corporate identities, using intercompany fund transfer, and undermining the legal framework and due diligence process of credit sanctioning.
Through trade-based money laundering in the forms of under-invoicing, over-invoicing, multiple invoicing, and false invoicing, significant amounts of money were syphoned off through cross-border transactions. According to a report by the Global Financial Integrity (GFI), $61.6 billion was smuggled out of Bangladesh from 2005 to 2014. Bangladesh loses $8.27 billion annually to trade misinvoicing. By 2030, GFI predicts this could exceed $14 billion per year.
During the aforementioned crisis, the Bangladesh Bank, the apex banking regulatory body in the country, failed to play a decisive role in rescuing the sector. Notably, the tenure of one former governor was controversially extended through an amendment of the Bangladesh Bank Order. Similarly, the role of the immediate last governor was widely criticised, as he disappeared from public view following the fall of the Awami League government in August. These two controversial appointments undermined the regulatory integrity of the central bank. Furthermore, lenient policies, particularly circulars on loan classification and restructuring, facilitated easy credit access for oligarchs, exacerbating the situation. During the pandemic, the monetary stimulus provided by the central bank disproportionately benefited businessmen and bank owners, which further deepened the financial inequities.
Most fourth-generation banks are in critical financial health. A corrupt nexus of oligarchic politicians, bureaucrats, and businessmen is primarily responsible for the dire state of the banking sector. What’s encouraging is that the new authorities have taken immediate bold steps to rescue the financial sector, such as disbanding the boards of directors of banks controlled by S Alam Group, imposing limits on cash withdrawals to balance liquidity, introducing market-determined interest rates, abolishing LC margins for essential commodity importers, maintaining strong provisions against impaired assets, and issuing a master circular aligned with IFRS-9 and international best practices for loan classification and guidelines. Now is the time for the Bangladesh Bank to strengthen the financial sector and elevate it to greater heights, setting an example of resilience.
In Bangladesh, over the last decade, there has been a troubling practice of bank directors sanctioning loans for their own business ventures, prioritising personal interests over the bank’s interests.