Prof. M. Muzahidul Islam :After the impendence in 1971 the banking sector of Bangladesh started its journey with a new dream and new commitment towards equity and social justice along with growth and development. The newly independent government immediately designated the Dhaka branch of the State Bank of Pakistan as the central bank and renamed it as Bangladesh Bank. The Bangladesh government initially nationalized the entire domestic banking system and proceeded to reorganize and rename the various banks. Foreign-owned banks were permitted to continue doing business in Bangladesh. The new banking system succeeded in establishing reasonably efficient procedures for managing credit and foreign exchange. After the independence, banking industry in Bangladesh started its journey with 6 nationalized commercialized banks, 2 State owned specialized banks and 3 Foreign Banks. In the 1980’s, banking industry achieved significant expansion with the entrance of private banks. Now, banks in Bangladesh are primarily of two types:Scheduled Banks: The banks which get license to operate under Bank Company Act, 1991 (Amended in 2003) are termed as Scheduled Banks. Non-Scheduled Banks: The banks which are established for special and definite objective and operate under the acts that are enacted for meeting up those objectives, are termed as Non-Scheduled Banks. These banks cannot perform all functions of scheduled banks.There are 56 scheduled banks in Bangladesh who operate under full control and supervision of Bangladesh Bank which is empowered to do so through Bangladesh Bank Order, 1972 and Bank Company Act, 1991. Scheduled Banks are classified into following types:State Owned Commercial Banks (SOCBs): There are 5 SOCBs which are fully or majorly owned by the Government of Bangladesh.Specialized Banks (SDBs): Four specialized banks are now operating which were established for specific objectives like agricultural or industrial development. These banks are also fully or majorly owned by the Government of Bangladesh. Private Commercial Banks (PCBs): There are 39 private commercial banks which are majorly owned by the private entities. PCBs can be categorized into two groups:Conventional PCBs: 31 conventional PCBs are now operating in the industry. They perform the banking functions in conventional fashion i.e interest based operations.Islami Shariah based PCBs: There are 8 Islami Shariah based PCBs in Bangladesh and they execute banking activities according to Islami Shariah based principles i.e. Profit-Loss Sharing (PLS) mode. Foreign Commercial Banks (FCBs): 9 FCBs are operating in Bangladesh as the branches of the banks which are incorporated in abroad.There are now 3 non-scheduled banks in Bangladesh which are:Ansar VDP Unnayan BankKarmashangosthan BankProbashi Kollyan BankIntroduction of Islamic Banking System in the mainstream banking system is a remarkable development in the banking history of Bangladesh. Islami Bank Bangladesh Ltd. is the first Islamic bank in Bangladesh. It was established as a result of a high demand from people in the country. The mission of this bank was to establish Islamic banking through the introduction of a welfare oriented banking system and also ensure equity and justice in the field of all economic activities, achieve balanced growth and equitable development in through diversified investment operations particularly in the priority sectors and less developed areas of the country. In 1974, Bangladesh singed the IDB Charter and made commitment to Islamized the banking system gradually. In 1981, Bangladesh Bank with Mr. Nurul Islam, the then Governor in the chair decided in 17th Bankers’ meeting to open Islamic Banking Window in all banks. This meeting also decided to open at least one Islamic Branch in District level. In this year, 37 senior bankers received training at Sonali Bank Staff College to form working group for establishing Islamic banks. In 1983, Islami Bank Bangladesh Limited was established. In 1987 Al-Baraka Bank was established. In 1995 two more Banks namely Al-Arafah Ismai Bank and Social Islami Bank got license to operate as Islamic Bank. Two conventional banks namely EXIM bank and First Security Islami Bank converted themselves as Islamic bank. Shahjalal Islami Bank, a third generation bank was established in the year 2000. At last in 2012 Union bank limited was established as the 8th Islamic bank of the country. In total 8 full-fledged Islamic banks and 17 conventional banks having Islamic banking windows/branches are operating in the country. The total number of branches of 8 Islamic banks are around 850 with 25,000 employees. The government’s encouragement during the late 1970s and early 1980s of agricultural development and private industry brought changes in lending strategies. Managed by the Bangladesh Krishi Bank, a specialized agricultural banking institution, lending to farmers and fishermen dramatically expanded. The number of rural bank branches doubled between 1977 and 1985, to more than 3,330. Denationalization and private industrial growth led the Bangladesh Bank and the World Bank to focus their lending on the emerging private manufacturing sector. The transformation of finance priorities brought with it problems in administration. No sound project-appraisal system was in place to identify viable borrowers and projects. Lending institutions did not have adequate autonomy to choose borrowers and projects and were often instructed by the political authorities. In addition, the incentive system for the banks stressed disbursements rather than recoveries, and the accounting and debt collection systems were inadequate to deal with the problems of loan recovery. It became more common for borrowers to default on loans than to repay them; the lending system was simply disbursing grant assistance to private individuals who qualified for loans more for political than for economic reasons. The rate of recovery on agricultural loans was only 27 percent in FY 1986, and the rate on industrial loans was even worse. As a result of this poor showing, major donors applied pressure to induce the government and banks to take firmer action to strengthen internal bank management and credit discipline. As a consequence, recovery rates began to improve in 1987. The National Commission on Money, Credit, and Banking recommended broad structural changes in Bangladesh’s system of financial intermediation early in 1987, many of which were built into a three-year compensatory financing facility signed by Bangladesh with the IMF in February 1987.Beginning in late 1985, the government pursued a tight monetary policy aimed at limiting the growth of domestic private credit and government borrowing from the banking system. The policy was largely successful in reducing the growth of the money supply and total domestic credit. Net credit to the government actually declined in FY 1986. The problem of credit recovery remained a threat to monetary stability, responsible for serious resource misallocation and harsh inequities. Although the government had begun effective measures to improve financial discipline, the draconian contraction of credit availability contained the risk of inadvertently discouraging new economic activity.Foreign exchange reserves at the end of FY 1986 were US$476 million, equivalent to slightly more than two months worth of imports. This represented a 20-percent increase of reserves. The banking industry in Bangladesh has flourished over the years, making double-digit profit percentages, sustaining growth and surviving cut-throat competition while providing attractive returns to shareholders. However, the greed for more without befitting platform and fundamentals, brings its own challenges and questions in people’s minds. Challenges facing the Banking Industry of BangladeshIt was unique for the banking industry of Bangladesh that they could survive the global financial crisis that started in 2008 and still not ended. In spite of this notable success the banking sector is still facing a number of challenges. If the Government is guided by law and the regulatory authority is vigilant and top on that the bankers themselves are sincere and cooperative then these challenges could be overcome. The challenges that are being faced by the banking sector of Bangladesh can be summarized as below.Excess Liquidity in the Banking SectorExcess of liquidity in the banking business has been a chronic problem in recent years. After the crash in the stock market in the year 2010 there was shortage of liquidity in the banking sector. But currently there prevailing an opposite scenerio. Excess of liquidity in the banking reached over Tk. 83000 crore at the end of November 2013 and since then it has been increasing whereas this was Tk. 80000 crore in July, 2013. Excess of liquidity of the banking sector has been increasing over the years mainly due to a noticeably low level of demand for credits by the private sector. This low level of demand for Loans and advances on the part of the private sector has been because of the worsen business situation of the country both in domestic and international market, consecutive contractionary monetary policy taken by Bangladesh Bank and long-persisting problems in supplying gas and power. The business community have been frustrated by the undesirable and non-cooperative played both by the opposition and the Government. It is alleged that in some cases they are trying to shift their investment from to abroad. Meanwhile a good number of industries have been closed and the owners of those industries are enjoying their time by overseas tours. The economy has been suffering from regular strikes and blockades over the recent years. Another reason behind the slow growth of credit is the rigid attitude of banks and financial institutions in giving loans due to a number of scams occurred in recent years. If this situation continues, then economy might contract further. According to a recent study Growth of credit in private sector went down to 11 percent in fiscal year 2012-13 compared to nearly 20 percent in the previous fiscal year. The disbursement of credit in both agriculture and industry sector in recent times is seen as decreasing trend which is alarming for the economy. The rate of growth in the industrial term loan has been experiencing an irregular movement with negative rate of growth since April-June, 2011. Adequate capital is needed for fast industrialisation of a country. Loan is one of the most important factors of capital formation, mainly for developing country like Bangladesh. Recovery of the industrial term loan has been increasing but at an insignificant amount. The rate of growth of agricultural credit disbursement and recovery of credit also experiencing lower trend as well as negative rate of growth after September, 2013. The rate of growth of the disbursement of the agricultural credit stood negative 5.4 percent in October 2013, where as it was positive 143.2 percent in the September 2013. Recovery of the agricultural credit disbursement has also been increasing at an insignificant amount. If the trend remains as usual, the disbursement, recovery and rate of growth of the agricultural credit disbursement might decline to Tk.1007.36 crore, Tk.1180.32 crore and 7.3 percent respsectively in November, 2013. Excess Borrowing of the Government from Banking System Excess Borrowing of the government from the banking system has been a common issue over the recent years. Leading economists of the country has been critical on this issue. At one point of time they were apprehending a shortage in the availability of investable fund in the private sector due to excess borrowing on the part of the government from the banking system. As the borrowing increases every year, its expenditure is also going up due to higher interest payment. It worked as double edged sowrd. The failing of the government to achieve growth of credit target is contributing to lower investment. At the same time, the incremental capital output ratio (ICOR) that measures investment required to increase GDP has deteriorated in the past few years. For example, the government would require investment rate to rise at 32.0 percent of GDP for achievement of 7.2 percent GDP rate of growth in FY 2013-14, if the ICOR remains same of the outgoing year. This tendency of the ICOR is also necessitating greater investment, and thus further growth of credit in the private sector. Moreover, if the existing policies remain unchanged, the savings-investment gap might increase sharply and might continue to increase in the upcoming fiscal years. Low credit delivery is likely to have an adverse effect on this gap as well. Negative Growth of Credit both in Private and Public SectorThe present situation of banking sector has been deteriorating in terms of growth of credit and disbursement and risk management. Besides this backdrop, questions are being raised concerning the far-sighted deregulation of the financial sector. Growth in investment exerts impact on the growth in GDP. The decline in the growth in credit illustrates the poor condition of investment which might drag down the current growth in GDP. For example, the government requires investment rate to rise at 32.0 percent of GDP for achievement of 7.2 percent rate of growth in GDP in FY 2013-14. Some long term issues have been persisting in the banking sector. Growth of credit in private sector registered at 11.07 percent in September 2013 over September 2012, and it was lower than the growth of 19.88 percent witnessed at the same period in the previous year.Growth of credit in private sector shows a declining trend over the recent years. According to a recent survey it stood at 11.07 percent in September 2013 against 19.88 percent of the previous year. This slow-down in the growth rate of credit recent years has been due to consecutive contractionary monetary policy taken by Bangladesh bank, persistent political unrest and uncertainty in the country, Lack of infrastructural facilities and lawlessness. In public sector it has been observed a negative rate of growth of 43.15 percent in July-September, 2013-14 over July-September, 2012-13. The rate of growth of credit in private sector and public sector might decline further if the political unrest continues for an indefinite period. Although the total loan given by state owned commercial banks, foreign banks, and non-bank financial institution, except the specialized banks sector, increased to Tk. 473242.7 crore at the end of September, 2013 from Tk. 466162.3 crore at the end of June 2013, SME loan as a percentage of total loans has been increasing at an insignificant amount. Even though the total SME loan decreased by Tk. 9451.91 crore at the end of September 2013 from Tk. 24398.34 crore at the end of September 2012, the rate of growth of SME loan was negative at 5.25 percent in March, 2013. Especially, state owned banks observed a negative growth of 38.47 percent at the end of September 2013 compared to September 2012. Poor Performance in Risk ManagementRisk management comprises of capital adequacy, asset quality, non-performing loan, expenditure- income ratio and return on Asset (ROA), return on Equity (ROE) and non-performing loan (NPL) which indicates the lack of presence of prudential surveillance on the financial sector and profitability of bank. Here, ROA is the ratio of net earnings of a year to average whole assets of a business in a financial year while ROE means the measurement of the rate of return on the ownership interest of the common stock owners and the term NPL refers to the loan that is in default. Capital adequacy is determined by Capital to Risk Weighted Assets which is most important. Currently, a banking company is to maintain 10 percent of Risk Weighted Assets (RWA) or Tk. 200 crore whichever is higher as its minimum required capital. Shortfall of capital by the four state-owned commercial banks imposed a condition that government would have to restore capital position under the extended credit facility loans driven by International Monetary Fund (IMF). To meet the requirement of the IMF, finance ministry decided to revise the recapitalisation of bank proposals. After that revision, banking division will distribute Tk. 4100 crore in the first phase against their capital shortfall of Tk. 8863 croreHighly Politicized Bank AdministrationIt is not new phenomenon that the banking sector of Bangladesh is highly politicised. Any government come the power takes some quick but unethical decisions. Firstly, they appoints most of chairpersons directors of all bnks and financial institutions under their control based on political identity. Secondly they create some new banks and financial institutions under the leadership of their political friend and partners. In most of the cases these appointees are unqualified and inexperienced, technically unsound and politically motivated and in some cases greedy and dishonest. If we look at the recent as well as past big scandal in the banking sector of Bangladesh, we shall gather same experiences. The present government was not an exception. News published in national dailies about bank directors and chairmen’s involvement in politics and underhand deals using banks’ goodwill raises question about the banks’ independence in running their operations. It is a big question whether excessive regulation is the reason behind the veneer of goodness or whether there are other regulatory malpractices, disconnects or deficiencies that allow these banks to take advantage of the situation.Image CrisisThe image of the banking industry has many times been tarnished by several stories regarding the owners in recent media releases. Despite the considerable progress made, foreign countries are still somehow treating our banking industry activities as questionable. In a recent report the IMF has mentioned Bangladesh Bank as a weak central bank because of its insufficient measures to control the banking industry of Bangladesh. However Bangladesh Bank, in spite of its limitations, is trying hard to bring discipline in the banking sector. A number of big scandals in the banking industry aggravated the image crisis. Hallmark. Bismillah Group and BASIC Bank scandals among others are noteworthy. Again the issue of robbery in a number of branches of the state owned Sonali Bank has distorted the trust of the common people regarding safe-keeping of money and other resources by the bank. Countering the image issue is not the only block in the road to developing a respectable and successful institution, there are also the problems of 2 Ps 3Cs and a T- people, product, compliance and ethics, competition, change management and technology among others. Unhealthy CompetitionThough someone may differ, competition in Bangladesh seems to be the deadliest in all sectors of the economy. It not only brings in positive developments but also encourages malpractice. There is competition not only from other banks but also from non-bank financial institutions (NBFI) and micro finance institutions (MFI). In particular the introduction of 8 new banks in recent years has sharpen this cxompetition.Not only are the institutions competing, the regulators and customers are also pitting one against the other, making the situation extremely difficult giving one the feeling of being stuck between a rock and a hard wall. A customer will often try to make the best out of the situation by not complying with the regulatory requirement, referring to the service provided by another bank or banks. The requirement of bankers to meet steep targets often results in succumbing to the demand of these corporates, resulting in bypassing of the regulation. One bypass results in another and then another resulting in a whole network of malpractices, which often becomes the norm. Competition in the banking industry is also hitting from the capital market end, with the corporates increasingly going to the equity market to raise funding. This not only hits the banks in the belly by affecting their core business but also indirectly affects their contribution to market cap which dropped from 59% in 2007 to less than 25% in June 2010. More importantly it forces them to risk their position by over exposing them to volatile capital market through proprietary trading and position taking in order to maintain profitability.Lack of Skilled Human resourcesBanking as a most modern and sophisticated financial service industry badly needs skilled human resources who will not only service old products but will also create and launch new innovative products. Educating the market remains the first requirement towards creating new products and developing skilled human resources. Besides people and product issues, the bank officials need to be ever vigilant about the ever-changing technology and regulatory requirements. There has been a shortage of efficient and effective human resources in the banking sector of Bangladesh. In the backdrop of this shortage unhealthy and unethical practice of hunting from a sister bank has become a regular phenomenon, which creates misunderstanding among frienly organizations. This should be avoided. There are banks who does not have their own training and research institutes. This is unacceptable. Banks should give more emphasis to train their manpower. Some banks can encourage their prospective officers to pursue Diploma or Certificate courses offered by universities or business education institutes both in home and abroad.The bad culture of non-complianceAnother challenge for Bangladesh banking industry is non-compliance. There is tendency among the bankers to remain reluctant in terms of compliance of the guidelines and verdict of the regulatory authority. This non-compliances have a wide ranges of coverage. Maintainingg the number of directors, the issue of electing directors in the category of depositors, nomination of independent directors, maintaining deposit investment ratio, maintaining spread in the rate of interest, avoiding risky investment, maintaining capital adequacy ratio, avoiding insider lending and compliance of Shariah principles are among others the issues on which the bankers most often fails to comply.The new offering in the market which has got all banks running are the requirements of BASEL II & Automated Clearing House. The major challenge with change of regulation is that often the regulators are in a hurry to implement a sudden decision, rolling out action plans without proper research or understanding the broad implications and capabilities of the banks to comply with it. The outcome is delay in implementation, confusion among stakeholders and new techniques to bypass these regulations. This in its turn creates a non-level playing field for those who comply with the regulation versus those cleverly “managing” the situation without having to comply. Too much noise and less action, at times, creates doubt about the sincerity of the purpose.As a law-abiding citizen one may wonder why it is so easy to “manage” non-compliance? The final question remains – who is losing out by this? Ultimately, every citizen of the country, as our country suffers. The banking sector could be our pride and a major growth engine of the economy. Regulators need to take appropriate decisions and measures to implement proper regulations at the right time. An appropriate example is when several financial institutions shifted towards the riskier capital market to counter the lower growth in their core businesses using the depositors money, the regulators aptly stepped in to make merchant banks separate subsidiaries. The regulations are there. The problem is enforcing them in an honest manner. If the regulators and the legal system were honest then all these recurring image issues and malpractices could have been avoided. Facing the challenges head-on in a compliant manner should be our goal towards creating a sustainable, profitable and forward-looking banking sector. We need to do more and run faster with clear visibility about the destination. Perhaps, it also has to do a lot with the overall governance and accountability situation in the country.(Prof. M. Muzahidul Islam, Dept of Banking and Insurance,University of Dhaka, [email protected])
