Bangladesh needs to reduce its over dependency on the banking sector for long-term financing, experts opined at a seminar in the capital on Friday.
Instead, they called for developing a strong capital market as well as other alternative platforms as major sources of long-term funding.
Such views came at a seminar on the current status of the financial sector that was organised as part of the Capital Market Expo.
"The capital market, insurance and pension funds are the major sources of long-term financing in most of the countries around the world," said Dr. Mohammed Farashuddin, former governor of the Bangladesh Bank (BB), while speaking at the event,
"However, we still depend overwhelmingly on the banks for long-term funding."
He recalled that in the early '90s, the then government, following advice from an international organisation, compelled the private commercial banks to commence channelling long-term financing. That move was particularly unwise and inherently unstable.
"Now the time has come for the government and the banking sector to come out of that provision."
As an alternative, Dr. Farashuddin called for strengthening the capital market, particularly its bond market segment.
"Currently, a significant amount of money is lying idle with the insurance fund. Such insurance fund as well as pension fund can be used as alternative sources of long-term financing."
The former BB governor's views were echoed by the top central bank officials and banking sector high-ups present in the seminar.
"This is obvious that our capital adequacy is under strain," said Md. Arfan Ali, President and Managing Director of Bank Asia Limited, while referring to the overall banking industry in the country.
"The amount of non-performing loan (NPL) and loan write-off has increased so much that much of our income is spent on managing these things."
"This is a big worrying sign for us. If things go on like this, the banks will not be able to operate without injecting sufficient capital," he added.
Speakers at the seminar also noted that the pressure of channelling long-term financing is a big factor behind the ongoing liquidity crunch in the banking sector.
"Currently, our financial sector follows a bank-led model. But, to ensure enough long-term financing for our private sector, we have to explore the capital market," said the BB Adviser S K Sur Chowdhury.
"At the same time, we have to develop a secondary bond market. We have to issue corporate bonds. Besides, we have to ensure that these corporate bonds can be used as collaterals."
Mr. Chowdhury also noted that the government has recently formed a high-powered committee for development of the bond market.
"There are some taxation-related issues when it comes to development of the bond market. However, we are talking with the Ministry of Finance to ease such taxation rules to encourage initial development of the market," he added.
Meanwhile, speaking on the occasion, Dr. Farashuddin also called for privatisation of the state-owned banks (SoBs).
"All the SoBs, apart from Sonali Bank Limited, should be gradually privatised."
"This has to be done gradually - may be, one bank at a time, each year. And for that, these SoBs need to determine the face value of their shares," the former BB governor said.
"Later, these banks should offload shares in the capital market to transfer their ownership to the public."
Dr. Farashuddin also recalled that as per rules of the Bangladesh Securities and Exchange Commission (BSEC), a person has to have at least two per cent share in the total paid-up capital of a company to be a director of that entity, which is 'anti-investment'.
"The Supreme Court has already ruled this provision as illegal. But until now, no necessary revision has taken place in this regard."
Recalling the share market turmoil of 2010-11, the former BB governor opined that the crisis could have been averted, if the central bank had strictly compelled the banks to maintain an advance-deposit ratio (ADR) of 85 per cent.
Dr. Farashuddin also observed that there should be no radical change in interest rates of the savings certificates, as it is a platform for the middle-class people to invest their hard-earned money.
"However, we need to ensure that the funding, coming from the savings certificates, is wisely spent," he added.
Speakers at the event also called for greater financial inclusion and product diversification in the banking sector to reach to a wider segment of clients and customers.
Director of Bangladesh Institute of Bank Management (BIBM) Shah Md. Ahsan Habib, Additional Managing Director of Prime Bank Limited Md. Tabarak Hossain Bhuiyan, and Managing Director of IIDFC Golam Sarwar Bhuiyan also spoke on the occasion.
