Bank mergers aim to prevent unfair gain

Bangladesh Bank has undertaken an initiative towards consolidation within the country's banking sector. For quite some time, certain banks in the country had been struggling to operate effectively. To address this situation, initiatives for consolidation have been taken primarily within the banking institutions. By consolidation, we refer to a scenario where two establishments merge to manage operations collectively. It's essential to note that consolidation doesn't always entail a merger of weaker entities with stronger ones or vice versa. Even entities of similar strength can engage in consolidation. The primary objective of consolidation is to strengthen market presence through increased organizational activities or to enhance competitiveness. When one entity acquires another, it's termed as acquisition. Typically, a well-performing entity is considered an acquiring institution, as it continues its commercial endeavors. Both consolidation and acquisition aim at ensuring profitability. Alternatively, if a weaker entity exists, it may be allowed to sustain within the market by providing a competitive environment without being forced out.

The initiative of consolidation in the banking sector of Bangladesh primarily aims to merge weaker banks with stronger ones. In the context of market demand and consolidation, Bangladesh's perspective differs. The number of banks in Bangladesh exceeds the actual requirement, resulting in some banks struggling to sustain competitiveness. Consequently, these banks are gradually weakening. Therefore, there's a necessity to explore alternative solutions for these struggling banks. By undertaking the initiative of bank consolidation, Bangladesh Bank has acknowledged the need to adapt to the changing times. The banks' approval for consolidation hasn't considered whether there's a real need for so many banks in our economy. Former Finance Minister Abul Maal Abdul Muhith stated upon granting approval to the latest nine banks, that the country has an excess number of banks. However, considering economic and political perspectives, approval for new banks has been granted; yet, banks or financial institutions aren't like typical business entities. Hence, their approval needs to consider the shape of the economy and demand.

It would have been prudent to consider whether the economy of the country can support such a multitude of banks. With an excess of banks, the market suffers from unhealthy competition, which is unsustainable. Since the approval of new banks in 2010, many have faced crisis. Several weaker banks were at risk of being phased out of the market, but Bangladesh Bank does not desire any bank in the country to fail or exit the market. The government shares this sentiment, preferring to maintain stability in the banking sector. Hence, there's a need to explore alternative paths to sustain these struggling banks. One such solution is consolidation, where weaker banks merge with stronger ones. Bangladesh Bank has officially advised the banking sector, stating that seven to 10 out of the 57 banks in operation aren't performing well and should consider consolidation.

Although Bangladesh Bank acknowledges that only seven to 10 banks aren't performing well, the reality might reveal a much larger number of struggling banks. To address this issue, Bangladesh Bank has put pressure on weaker banks to consider consolidation. However, the question remains whether Bangladesh Bank has the capability to facilitate such consolidation. Consolidating banks or financial institutions requires extensive efforts, including the creation of new regulations and policies. The discourse on bank consolidation in Bangladesh is relatively limited. In the recent past, in 2009, Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Sangstha were merged to form Bangladesh Development Bank Limited. However, there hasn't been any further consolidation of banks since then.

In the context of bank consolidation, we have a deficit of experience. Whether stronger banks are consolidating weaker ones against their will or voluntarily initiating these efforts is a crucial matter. Consolidation is not permissible if it goes against the will of any party involved. After consolidation, evaluating the weaker bank's value becomes imperative. No bank desires to merge with another only to suffer a devaluation.

Experiences from various countries around the world show that if a relatively weaker bank is consolidated with a stronger one, shareholders of the weaker bank start buying more shares in anticipation of higher profits. This leads to an increase in the value of shares of the relevant bank. However, in reality, there was no anticipation of such a significant increase in share prices.
In our country, the share market isn't regulated based on fundamental principles. Rumors play a significant role in our share market. Some individuals manipulate the market to serve their interests, while others benefit slightly. The majority of shareholders face uncertainty. The process of bank consolidation must be transparent and accountable.

When assessing the assets of weaker banks, utmost professionalism must be maintained. Accounting procedures should be carried out with the highest level of integrity using reputable audit firms. At every level of consolidation, maximum caution should be exercised. Questions may arise regarding the extent to which the objectives for which Bangladesh Development Bank Limited was formed have been achieved. The main objective of bank consolidation is to reduce the amount of non-performing loans to manageable levels; however, currently, non-performing loans at Bangladesh Development Bank Limited are nearly 40 percent. In this case, the objective of consolidation has not been achieved.

In our country, two bank consolidation initiatives have not been very successful, as exemplified by Bangladesh Development Bank Limited. Some may argue that since Bangladesh Development Bank Limited is a state-owned bank, it has been plagued by rampant corruption. Additionally, there may be issues of incompetence among the staff. However, the critical point to consider is how effectively these state-owned banks perform after consolidation.
Since we lack significant experience in bank consolidation, it may be necessary to seek assistance from experts from abroad to carry out the task. Ensuring that no one benefits illicitly from a bank consolidation effort is crucial. It has been observed that some individuals borrow from a bank and fail to repay, leading to the weakening of the bank. Subsequently, after consolidation, these same individuals might sell their shares in the company at a high price, thus profiting immensely. Such practices need to be rigorously prevented. If Bangladesh Bank truly intends to manage the consolidation process with integrity, it must ensure transparency in all aspects. There should be no room for suspicion of any kind of malpractice. Compliance with the law by everyone must be ensured.

After the consolidation of two institutions, there may arise a kind of psychological conflict among the employees. This could lead to a deterioration of the organization's activities. Therefore, it may be advisable to foster cooperation among employees after the consolidation of two institutions. From an administrative perspective, any hostile behavior towards others should not be tolerated. It is often stated when an institution consolidates that no employees will be laid off; however, this commitment is often not upheld, as layoffs are made to increase profitability.

One significant way to increase profits is through employee layoffs. Hence, when two institutions are consolidated, some ambitious employees may emerge. They may fear losing their jobs and may not have the same qualifications. There is a concern about the potential layoffs of less qualified employees.
Weak institutions gradually contribute to job losses. This situation exacerbates the issue of incompetence among their employees. Concerns may arise that some employees of institutions undergoing consolidation may be laid off. After consolidation, when the new entity sees its profits declining, it may attempt to manage the organization with fewer employees, which should not come as a surprise. We must move forward while accepting this reality.

However, efforts should be made by the banks to find alternative arrangements to utilize the redundant workforce of both institutions. In a market plagued by injustice, losing one's job is distressing. In such cases, setting performance targets for redundant employees as an alternative arrangement might be considered. They could be told that in the future, they will be assigned these tasks. If they fail to perform satisfactorily, they will lose their jobs. Setting such targets may motivate employees to strive for achieving them to retain their jobs. Those who succeed will keep their jobs, while those who fail will leave.

Since Bangladesh Bank aims to improve the situation of weak banks through consolidation, careful planning based on thorough analysis is necessary to prevent the initiative from failing.

Author: professor and former chairman of the Department of Banking and Insurance in Dhaka University.