One of main causes of crisis in banking sector is dual governance

The sector of Bangladesh’s economy that has been most severely affected in recent times is the banking sector. The banking sector is often compared to the flow of blood in the arteries of a country’s economy. Just as a disruption in the natural flow of blood in a human or animal can cause physical complications or even death, likewise, if the banking sector of a country is not properly and efficiently managed, problems will inevitably arise in various sectors of the economy. Due to financial limitations, entrepreneurs in developing countries like Bangladesh must turn to banks to meet their capital needs. But the banking sector is failing to provide the desired support to entrepreneurs and ordinary borrowers.

Over the last fifteen and a half years of the previous government’s tenure, the country's banking sector was driven into disarray. The banking sector essentially became a subservient institution of a special group aligned with the government. Laws governing the banking sector were changed or amended to suit the desires of that special group. The banking laws in our country are lenient towards loan defaulters and delinquent borrowers, but not equally considerate towards those who repay their loans regularly. Recently, there have been attempts through legal manoeuvres to underreport the amount of default loans by not collecting the instalments. A prominent economist described this effort by the government as a failed attempt to “make the room look clean by hiding the dirt under the carpet.” During the previous government, those managing the banking sector could be seen making dangerous attempts to show lower figures of defaulted loans without recovering instalments. According to the latest accounts, the volume of defaulted loans in the country’s banking sector has reached Tk 4.2 trillion. However, those involved in the banking sector believe the actual figure is much higher. Anyone would agree that the banking sector is in poor shape. But the question is: who is responsible for this dire state of the banking sector?

It is often said that a human can survive the loss of a limb. But if someone suffers brain damage, it becomes impossible for them to live as a normal human being. While we often discuss various reasons behind the sorry state of the banking sector, the real cause remains largely hidden from public view. One of the key reasons behind the decline of the banking sector is that it is subject to dual governance. Dual governance never yields good results — as we English experienced after acquiring the Diwani of Bengal, Bihar, and Orissa. After the defeat of Nawab Siraj-ud-Daulah on June 23, 1757, at the battlefield of Plassey, Mir Jafar was appointed as the Nawab of Bengal. In 1765, the English received the Diwani (right to collect revenue) of Bengal, Bihar, and Orissa from the Mughal Emperor Bahadur Shah of Delhi. The English were responsible for revenue collection, while the Nawab retained control over law and order and administrative affairs. This dual rule led to a famine in Bengal where millions died from lack of food. This incident clearly demonstrates that dual governance can never bring benefit to a country or institution. For any sector to be properly managed, sole authority is essential.

The banking sector in Bangladesh has long been plagued by dual governance, resulting in continuous disorder. The central bank of every country generally enjoys autonomous status. It can make decisions based on its own judgment and discretion, even if those decisions are not to the government’s liking. But Bangladesh Bank cannot make independent decisions. Bangladesh Bank is able to exercise its authority mostly over privately owned banks. But it has little control over state-owned banks. For state-owned banks, the authority to make decisions rests with the Financial Institutions Division under the Ministry of Finance. Bangladesh Bank cannot exert authority over state-owned banks at will.

Bangladesh Bank cannot act outside the decisions of the Financial Institutions Division. During the tenure of the previous government, approval was granted for nine new privately owned banks. At the time, Bangladesh Bank expressed its opposition to the approval of these new banks. But the Financial Institutions Division of the Ministry of Finance ignored these objections. Former Finance Minister Abul Maal Abdul Muhith (now deceased) said there was no need for new banks at that time. Nevertheless, for political reasons, approval was given to establish nine new banks. Bangladesh Bank cannot take any action outside the decisions of the Financial Institutions Division because it is itself controlled by the division.

When appointing governors of Bangladesh Bank, the Financial Institutions Division selects individuals who will comply with the instructions of a particular influential group within the government. The two governors prior to the current Governor Dr Ahsan H Mansur (Dr Fazle Kabir and Abdur Rouf Talukder) worked closely with the Ministry of Finance. They were in no way reputed bankers. Those who serve in government positions for a long time are generally hesitant to make independent decisions. Government employees are like caged obedient birds — even if released into the open sky, they cannot fly freely and instead return to the cage. The same applies to government employees — they cannot go beyond the decisions of ministers or higher authorities. If someone who was once their boss becomes a minister, is it possible for a subordinate to defy their instructions? During their tenures as governors of Bangladesh Bank, former bureaucrats Dr Fazle Kabir and Abdur Rouf Talukder were involved in disgraceful incidents in the banking sector. At events hosted by businesspeople, they announced a cap of 9 percent on interest rates for bank loans. The maximum deposit rate was set at 5.5 percent for state-owned banks and 6 percent for privately owned banks.

It is rare in global history for a central bank governor to make such a policy announcement in the presence of businesspeople. To encourage depositors to place their surplus funds in privately owned banks, these banks were allowed to offer 0.50 percent higher interest on deposits. Previously, state-owned institutions were allowed to keep a maximum of 25 percent of their deposits in privately owned banks, while the remaining 75 percent had to be kept in state-owned banks. Bangladesh Bank changed this rule to allow up to 50 percent of state-owned institution deposits to be placed in privately owned banks. Bangladesh Bank did not protect the interests of state-owned banks; instead, it served the interests of private banks.

One glaring example of how a specially favoured group by the government influenced Bangladesh Bank’s policy decisions is the restructuring of defaulted loans amounting to Tk 5 billion and above. To mark the one-year anniversary of the controversial 2014 national elections, political parties organised a three-month-long protest. During this time, under the protection of government forces, a special group carried out arson across the country, causing immense damage to property. Following the plans of Salman F Rahman and a few other entrepreneurs, Bangladesh Bank restructured defaulted loans of 5 billion taka and above. Defaulted loans totalling Tk 150 billion belonging to 11 business groups were rescheduled under easy terms. Questions were raised at the time: were only those with defaulted loans of Tk 5 billion and above affected by the political unrest? Were those who defaulted on loans of Tk 4.99 billion not affected? Why was this facility offered only to a select group? Could the benefit not have been made available to everyone?

Former Finance Minister AHM Mustafa Kamal caused the greatest damage to the banking sector during his tenure. He made legal changes that further weakened the banking system. There has never been a finance minister in Bangladesh’s history as controversial and damaging to the economy as him. He manipulated various statistics to showcase the government’s achievements, which bore no relation to reality. No other businessman in the country’s history has served as finance minister. AHM Mustafa Kamal was the only businessman to hold the post, and during his tenure, the banking sector suffered the most. Previously, a loan account could be rescheduled a maximum of three times. The first time required a 10 percent down payment of the total defaulted loan, the second time 20 percent, and the third time 30 percent. Towards the end of his tenure, AHM Mustafa Kamal allowed rescheduling for 10 years with a one-year grace period and only a 2 percent down payment.

Financial adviser Dr Salehuddin Ahmed recently remarked that Bangladesh Bank had long been functioning under the instructions of the Financial Institutions Division of the Ministry of Finance and had not been able to make independent decisions. At present, that control by the Financial Institutions Division over Bangladesh Bank has almost ceased. His statement is highly significant. To bring proper governance to the banking sector, the Financial Institutions Division of the Ministry of Finance should be abolished immediately. In the 1990s, when M Saifur Rahman was finance minister, the Financial Institutions Division was once dissolved. Why it was later reinstated is unclear. Bangladesh Bank must be granted effective autonomy. At the same time, steps must be taken to enhance the competence of those working at Bangladesh Bank.

A particular class of officers hidden within Bangladesh Bank often take controversial steps for personal gain. These individuals must be identified and brought to justice. One example of how Bangladesh Bank officials sabotaged a noble initiative is the “Agricultural and Rural Credit” programme. This programme was launched in 2010 to support small, agriculture-based initiatives in rural areas. It was a unique credit scheme. Banks were required to distribute a set amount of loans as agricultural and rural credit each year. If a bank failed to meet the target, the unused funds would be deposited with Bangladesh Bank as interest-free deposits. The bank would not be allowed to open new branches the following year, and its rating would drop. If a bank directly provided agricultural and rural loans, it could offer loans of 50,000 to 100,000 taka per entrepreneur. But under the NGO wholesale linkage model, banks could disburse as much as they liked to a single NGO.

If scheduled banks distributed agricultural and rural loans through NGOs, they were allowed to charge 1 percent less interest than usual bank loans. But NGOs, when distributing loans to grassroots entrepreneurs, charged up to 24 percent interest. That is, both the banks and the NGOs profited from agricultural and rural lending. But the target group — the small entrepreneurs — suffered losses. They had to borrow at interest rates at least three times higher than regular bank rates. Due to objections from various quarters, Bangladesh Bank has now instructed scheduled banks to disburse at least 50 percent of agricultural and rural loans through their own branches.

MA Khaleque: Retired General Manager, Bangladesh Development Bank PLC and writer on economic issues