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Banking in Bangladesh : Challenges and ways out

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Khondkar Ibrahim Khaled :
Banking is a vibrant sector of economy in Bangladesh. With rapid economic growth in the country, banks have expanded their branch network and business operations. Now banking services are available far beyond Upazilla and even Union levels.
During recent years, banks have diversified their services through innovation. Mobile banking is one such innovative service which has become popular in a short period of time. This has opened the way of operating agent banking. Have we identified new risks and developed new measures?
Banks have rapidly transcended to automated operations from manual operations. Most of the rural branches are computerized. Some of the banks are completely on-line. Mechanization has taken the banks to a new age with new opportunities as well as new challenges. We are learning at a cost. Have we analyzed mechanization risks for taking remedial measures?     
Achievements are not free from challenges. In the process, banks have faced many challenges and succeeded to overcome those. It is, however, a continuous process. New challenges emerge. Old challenges also appear with new dimensions.
Expansion of banking diversification of services and automation of operations have triggered new problems and challenges for the banking organizations. Problems are cultural, managerial, technological as well as systemic. Banks are handling the problems in their own way. We may try to identify some problems which are, by and large, sectoral in nature.   
Loan default continues to be the number one problem of our banking sector. It is not a new problem. It is persisting for more than three decades. After promulgation of Martial Law in 1975 and later on during the process of forming political party, banks were used for distribution of favour. From 1978 onwards, banks were increasingly burdened with staggering amount of classified loans. In 1986, World Bank alarmed the government and proposed for reform initiative. Finally, Financial Sector Reform Project (FSRP) started in 1990 for large scale reforms and continued for 5 years. Classified  loan of Sonali Bank was 40% according to local audit report. World Bank study revealed that actual amount of default loan was 52%. Project ended with good results. But banks failed to keep it up. From 2000 onwards, deterioration started alarmingly. To clean the books of accounts, government enacted a law facilitating the banks to write off and transfer huge amount of bad loan from the balance sheet. Thus the banks became 'clean' in an 'unclean' manner. After the cleaning operation, banks' classified loans should have remained in a low scale, say below 3%. But most of the banks failed to manage credit portfolio effectively, resulting accumulation of classified loans exceeding ten percent in some banks.
It is believed that ethical standard has gone down in many banks and so is the standard of professionalism. Organizational culture has changed. Dishonesty and indiscipline have eroded professionalism. Such distortion is different and distinct from inefficiency and lack of knowledge. Inefficiency is responsible for low productivity, while dishonesty and indiscipline are responsible for destruction of the organization. In recent years, a number of banking crimes came up in the media. It was a matter of concern for depositors in particular and common people in general. Sonali Banks'  Hallmark scandal involved around Tk. 4000 crore. Basic Bank swindling involved around Tk. 4000 crore. Bismillah group swindled around Tk. 500 crore. Scandals involving Tk. 100 crore or less are many in number. Sonali and Basic Bank are owned by the government. Chairman, Directors and Managing Directors are appointed by the government. They can not remain unaccountable for such big scandal. But the Chairmen and Directors were not questioned by the Authorities.  Dishonesty virus has paralyzed the private banking sector as well. Bangladesh Bank has deputed 'observer' to five banks. It is a matter of concern. Can 'observers' change the scenario? Probably some banks deserve an 'Administrator' instead of 'observer' from the Central bank. Dishonesty is highly cancerous. Nothing short of surgery can cure it. Concerned citizens are raising an unanswered   question, 'who will bell the cat?'
Concentration of loans to small number of 'groups' is a new challenge for the flourishing banking sector. Banks are engaged in financial intermediation. They will collect deposits from the people and invest to good entrepreneurs who will pay back the loan with interest. There is big business. There are millions of small business as well. From the point of view of 'risk', banks should better put their eggs in as many baskets as possible, so that any mishap in one basket may not jeopardize the financial position of the bank.  Other baskets will ensure safety. From ethical point of view, banks are 'trustees' of people's fund. Hence social justice is demanded. Small depositors are many in number. Hence banks should lend to large number of small entrepreneurs for social justice. Close scrutiny reveals that most of the banks have concentrated loans to a few hands. In many cases, banks have gone out of the way to dish out loans far beyond needs and capacity of borrowers.  This has pushed the banks to fatal risks. Banks have also betrayed social justice. Private Banks are more exposed to such position, compared to government owned banks. Is it because of owner management collusion?     
There exists large scale allegation of interfering with professionals by the owners of banks. Owners are using stick and carrot policy for hiring and firing senior executives. It is alleged that owners allure the executives with very high salary, disproportionate with salary of other executives of the same bank, for the purpose of using the CEO to serve owners undue interest. Such executives are fired if they do not fall in line. Such banks are not managed rationally by the professionals. They are arbitrarily ruled by brute owners. Quite a few examples are on record. Media has brought specific incidents for notice of people as well as government. On the Carrot side, some CEOs receive salary three to five times higher than that of their immediate next executives. On the stick side, many CEOs have been forced out of job. During past six months, at least four CEOs have been eased out under the guise of 'resignation'. This is indeed a danger signal for the banking organizations. Ownership characteristics of banks fundamentally differs from that of other commercial organizations. Paid up capital of banks is insignificant compared to huge amount of peoples deposits which form the bank's 'working capital'. Banks earn profit by using deposits. Paid up capital does not play significant role in earning profit. But entire amount of profit is distributed among owners i.e. share holders as dividend, as is done in case of other commercial organizations which earn mainly on owners capital. This is unfair from ethical point of view as well as risky for depositors' security. To face this challenge, 'independent directors' have been introduced in the board of the bank to safeguard interest of depositors. Again, the owners select and appoint independent directors who serve owners' interest. This betrays the purpose. Considering depositors role in activating and promoting business and share holders' insignificant contribution to deployable fund of banks, we may ponder over the problem and bring reform in restructuring the Board of the bank. 50% of the board members may be elected by the share holders to look after their interest. Rest 50% Board members may be identified, selected and appointed by a special commission (or central bank?) to safeguard the interests of the depositors. Independent directors must not be dependent on share holder directors. In the face of gross interference, delinquency and greed of share holders, similar reform deserves consideration not only to protect depositors, but also to promote economy of the country.             

(The writer is ex Deputy Governor, Bangladesh Bank, ex. Chairman, Bangladesh Krishi Bank, ex Chair Professor, Bangladesh Institute of Bank Management) 

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