The banking sector in Bangladesh is in the midst of a crisis because a recent amendment in the country’s banking laws is deemed as a move by the ruling party to favour its political supporters.
Recent developments in the banking laws of Bangladesh could spell more trouble.
“Regulation is necessary, particularly in a sector like the banking sector, which exposes countries and people to a risk”— Christine Lagarde, Managing Director, IMF.
“This [Banking Companies (Amendment) Act 2017] is definitely not desirable for good governance in the banking sector. I think the government has surrendered to the pressure exerted by the business lobby. Other than this, I don't find any justification.”
—Mirza Azizul Islam, a former advisor to a caretaker government in
Bangladesh. Although the history of banking dates back to the early and medieval eras, the modern system emerged with the establishment of the Bank of England in 1695. From the initial stage of cash/ debt handling on hand-written notes to cheques and expansion of work covering clearing facilities, security investments, etc., banking has emerged as one of the most complex and financially viable economic sectors.
According to a source, there exist 59 banks that are among the largest in the world. A well-developed banking system is indispensable for modern trade and commerce. In today’s world, banks not only act as custodians of public money but are also vital agents for maintenance of a sound financial position of a country. Consequently, regulations are in operation to check, among other things, malpractices, monopolistic trends and generally accepted mercantile traditions. These laws and rules have evolved with the passage of time in accordance with the needs of a rapidly changing technological world. However, provisions related to public interest have more or less remained consistent.
Bangladesh became independent in 1971 and falls in the category of developing countries where the banking sector plays a key role in the economic development of the country. The first step in this direction was nationalization of the existing seven banks. The main objectives were to allow the poor access to funds, reduce capital flight to foreign countries and increase domestic investment but, by 1976, the government realized that these banks were unable to pursue the policies laid down by the government. In view of the pathetic performance of the nationalized banks, the private sector was invited to take on this responsibility and improve the falling financial position of the country.
Right now 42 private commercial banks and around 11 foreign banks, in addition to a number of non-scheduled banks and financial institutions, are operating in Bangladesh. This proves how well-embedded is the competitive market in Bangladesh as far as the banking industry is concerned. There can be no two opinions that the government needs to have strict regulations to maintain control and equity over such a large economic zone. At the same time, despite stringent rules, the government heavily relies on this sector to meet its budgetary requirements and cannot afford to alienate its support. The government has to offer a few carrots as use of merely the stick might cause substantial loss in terms of financial stability. As a result, the controversial Banking Companies (Amendment) Act 2017 was passed by the parliament. This came in the wake of a long-standing demand by the private bank owners.
The amendment aims at allowing four members, instead of two, of the same family to be on the board of a commercial bank. The law also lets directors of a commercial bank to serve three consecutive terms of three years each (meaning nine years in all) which
was earlier two terms. They would be able to reclaim the post after a break of three years. This amendment, has come at a time when bank directors have been allegedly found involved in irregularities in issuance of loans to dubious companies, resulting in loan defaults and causing significant financial losses. Most of the banks in the country are now suffering on account of default loans that have gone up by three times over a nine-year period. The banking sector’s non-performing loans (NPL) ratio was 9.23 per cent at the end of 2016 and 10.67 as of September 2017.
The opposition, experts and members of civil society have been raising strong voices against this amendment, expressing the following apprehensions: • Family control over private commercial banks would be established • Depositors’ interests could be at stake with possibility of important decisions being more family-oriented rather than in public interest. • Culture of loan default would be detrimental for the depositors in general as it would result in a low rate of interest. It would be detrimental for the country in particular. The government’s loosening control over the working of banks and forcing Bangladesh Bank for issuance of new banking licences to private parties which were earlier turned down for lack of financial health, might be damaging to the banking industry in general. Much consideration ought to be given before making crucial decisions for the banking industry otherwise it would be difficult to invoke financial discipline in the banking sector and this could prove to be a bad omen for the national economy.