A sector in disarray

Courier Briefing
Thursday, December 21st, 2017

Photo: Courtesy


Amid a plethora of unsavoury, crudely immoral and downright fraudulent or criminal incidents in the country’s banking sector coming to the fore, spanning both private and state-owned players,  Transparency International Bangladesh (TIB), the local chapter of a global anti-corruption watchdog, came out to express its concern over the “unprecedented anarchy and risk” prevailing at present in the banking and financial sector this week.


On the one hand, misuse of power, political influence and lobbying have led to unrestrained forgery, corruption and dominance of loan defaulters, while on the other hand, ineffective ad hoc measures by a section of the regulatory authorities leading to unprecedented anarchy and risk in the banking and financial sector, TIB said in a statement on December 17.


The corruption watchdog also suggested forming an expert committee composed of independent individuals and organisations to ensure good governance in the banking sector.


TIB urged the government to enact and implement a thorough and time-befitting policy keeping in mind short, middle, and long-term risks as per the recommendations of the expert committee.


TIB Executive Director Iftekharuzzaman said:”There is no alternative for the government, and particularly Bangladesh Bank, to form an expert committee involving skilled, experienced, independent and neutral individuals and organisations, and to enact and implement a full-fledged policy with plans to reduce short-, middle-, and long-term risk reduction plans as per the the recommendations of the expert committee.


“In their bid to prevent forgery, corruption and institutionalization of loan defaulting mediated through misuse of power, political influence and lobbying, a section of the regulatory authorities has not only been engaged in steps on ad hoc basis, rather unprecedented anarchy and crisis of trust have been created through imprudence and visible helplessness by leaving main problem unnoticed,” he added.


Dr Iftekharuzzaman also mentioned that despite some recent steps by Bangladesh Bank to tackle some crises in both state-owned and private commercial bank, including Farmers Bank and NRBC Bank, the anomalies still remain unchecked as the individuals involved are yet to be awarded with exemplary punishment.

The TIB executive director also noted that risks of institutionalizing the patron-client system have been created by the latest amendment to the company act – a reference to the amen


TIB is of the opinion that the existing unrestrained trend towards disregarding the law cannot be stopped unless the vested interested are identified in the sector, he said, adding that TIB expects that the government must show the political will and guts to ensure that the regulatory authorities do not bow to any pressure in meeting their responsibilities.


As of June this year, total default loan stood at Tk 63,365 crore, accounting for 10.06 percent of the total loan outstanding. State-owned banks accounted for one-third of the total sour loans. Regulators will need to make further efforts to tackle the sector’s deep-rooted problems of corruption, poor risk practices and collusion with industry. As the IMF pointed out in a recent report, an implicit government guarantee on their deposits keeps state-owned banks highly liquid, but a further deterioration in their balance sheets could negatively impact the fiscal balance.


The IMF also suggests that banks should be held strictly accountable to numerical targets agreed upon with the authorities and that reforms should focus on improving supervision, containing risks from loan concentration and improving the legal and financial framework for loan recovery. However, ultimately, any real clean-up of Bangladesh’s state-owned banks will have to begin with political will, which appears to have been limited so far.


Now with an election year knocking on the door, it is even more difficult to foresee such will being summoned by the country’s political leadership, mired in the devil’s handshake as it is that is the genesis of crony capitalism.


Debapriya Bhattacharya of the Centre for Policy Dialogue, who actually led the calls for an independent commission to address the range of issues affecting the entire financial sector is even more categorical in his assessment, albeit more resigned to the fate of the sector in an election year: “Till the election happens, no-one will touch the banking sector with any sort of reforming attitude,” he told Dhaka Courier over the telephone this week.


Back in July, Dr Bhattacharya had lauded the finance minister for sounding out such a step: “The finance minister also mentioned the banking commission in his budget speech and on several occasions before. But we have seen that it losses steam somewhere. People will be benefitted and satisfied if a reform commission is formed based on a transparent process ahead of the general election,” he had said then, in a program organized to share its observations on the budget for fiscal 2017-18.


The reason behind the repeated incidents is the absence of good governance and a lack of oversight on banks, according to Dr Bhattacharya. “Such incidents would not take place if there was a political will.”


What’s the story?


The majority of bankers think lack of corporate ethics and exemplary punishment is the key cause of the increase of financial crimes in the country’s banking sector, according to a survey conducted by the Bangladesh Institute of Bank Management.


Taking opinions from officials of 20 banks and consulting 49 bank annual reports, the survey found that 73 percent of bank employees felt financial crimes increased due to lack of corporate ethics while 58 per cent blamed the absence of exemplary punishment for the crime rise.


Fifty-three percent of the bank employees think the financial crimes rose due to lack of awareness about the wrongdoings, 50 percent blame lack of motivation, while 27 percent say poor compensation of employees is the reason.


The report was released at a workshop on ‘Corporate ethics and financial crime in banks of Bangladesh’ held at the BIBM on December 14.


Although a large sum of money is wasted through wilful defaults, the report said, wilful default is not recognized as a financial crime as they are not generally maintained and reported.


According to the BIBM survey, 65 percent of banks responded that they faced one or more financial incidents (read scams/scandals) in their banks during 2014-2016, while the number of credit card-related frauds increased remarkably during 2016-17.


Financial crimes include, among others, loan-, deposit- and cheque-related frauds, creating loan in the name of non-existent borrowers, fund diversion, collateral valuation, directed lending, fake title deed and change in loan limit and expiry date.


Bangladesh Bank deputy governor Abu Hena Mohd Razee Hassan, who was present at the workshop as chief guest, said banks operate public money and when a bank faces liquidity crisis due to scams, it affects the confidence of the depositors.


Mentioning that a severe liquidity crisis at a bank recently prevented the bank from even honouring depositors’ requests to withdraw their money, he said that the situation was a threat to the bank’s existence. We know now that the bank in question was the aforementioned Farmers Bank, one of the 9 ‘new banks’ sanctioned during the last year (2013) of the present AL regime’s first of what is now two consecutive terms in government. Farmers Bank was chaired by an ex-AL stalwart and home minister, M.K. ALamgir.


Pointing out over-invoicing of capital machinery as a major threat of money laundering, the deputy governor said lack of corporate governance surely devastates a bank within a short period of time.


According to BB data, the central bank’s vigilance and anti-fraud division carried out 72 special inspections to private commercial banks out of which 19 inspections were to Farmers Bank in 2015-16.


Former Prime Bank managing director Ahmed Kamal Khan Chowdhury said the existence of operational irregularities and women harassment in banks plays a key role in having unethical practices there. Calling it high time to stop unethical practices, he said that a centralized banking system might be introduced alongside branch-based banking to reduce loan-related authorization disputes.


Former Meghna Bank MD Mohammad Nurul Amin said today business interest groups seems to be even stronger than political groups and that the wastage of 10 percent of wealth due to loan defaults is a concern for the fading image crisis of the banks.


Former BB executive director Yasin Ali said wilful defaulters are equally liable as bank robbers and that ethics is more important in the banking sector because business is done here with public money. Despite concerns over unskilled bankers, three to four banks are sacking skilled mid-level employees and bringing inexperienced individuals from other industries, which is a matter of deep concern and requires the central bank’s interference, he added.


Former Pubali Bank MD Helal Ahmed Chowdhury said employees need to study the banking rules and guidelines properly before taking diverse responsibilities. Data integrity is a concern in the banking sector, absence of which leads to producing junks under the carpet, he added.


BIBM director general Toufic Ahmad Choudhury said a bank board exists to formulate policies and it is the duty of the management to sanction loans, but frustratingly, in Bangladesh the board sanctions loans.


Corporate culture still has a long way to be established in the country and corporate governance should include all the stakeholders including the board members, he added. He also said the BB should ensure board members stay abreast of banking rules and guidelines.


Against this backdrop, it was revealed that some 72 percent  bankers are in favour of reducing the number of banks in Bangladesh through mergers or acquisitions as their present number is too high given the size of the economy, according to a survey. About 88 percent of the respondents said mergers, acquisitions or takeovers may be executed to trim the number of banks, particularly the weak ones, found the survey of the BIBM.


In developed countries, the concept of merger is seen as an attempt to enhance profitability and expand internationally, but in Bangladesh the perception is that weak banks merge, said Khondkar Ibrahim Khaled, a former deputy governor of the central bank, at a recent seminar organised by the BIBM where the findings were revealed. “As a result no merger became successful in Bangladesh,” he said.


Khaled also said the excess number of banks will turn them into “grocery stores” soon. Moreover, the new amendment to the Banking Companies Act to allow four members from a single family to become directors of the board will bring disaster for the sector. He called upon bankers to raise their voice against the amendment that the cabinet has already approved.


But of course once again, what we are confronted with in reality is a picture almost oblivious to these concerns.


The more, the scarier


In the last week of November, and despite earlier revelations to the contrary, we learned that Bangladesh Bank was completing the primary process for issuing licences to two more private banks, which analysts claimed would be detrimental to the banking industry and the economy as a whole.


The finance ministry on November 15 sent a letter to the central bank asking it to take measures required to issue the licences, revealed sources at the central bank. In September, the Bangladesh Bank had turned down the licence requests of the same two banks on the grounds that the financial health of many banks, especially the nine newest, were deteriorating and that there was no need for new banks.


The BB had apprised Finance Minister AMA Muhith its decision in a letter that month but the minister asked the central bank to ‘scrutinise’ the proposals. The central bank changed its decision after the government high-ups instructed the regulator to approve the two new banks, sources said.


One of the proposed banks is Bengal Bank, initiated by Bengal Group of Industries, a local manufacturer of plastic products. Morshed Alam, a ruling party lawmaker, is the chairman of the group. The other bank is People’s Islami Bank, proposed by MA Kashem, an Awami League leader living in the US.


According to the BB officials, the paid-up capital of these banks would be Tk 400 crore, an amount identical to what each of the nine newest banks had paid in 2013.


The central bank in its letter to the finance minister had said that the financial health of many banks would have deteriorated further had the central bank not extended different policy support. It had turned down proposals for setting up the two new commercial banks on the grounds that the deteriorating financial health of many banks, especially the nine newest ones, did not warrant any new addition to the landscape.


But good sense had long left the building.

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