The banks and financial institutions of the country are now facing difficulties at maintaining healthy liquidity due to increasing size of non-performing loans (NPLs). As such, they cannot provide financing to prospective businesses and industries.
The country's GDP (gross domestic product) is growing at an impressive 8.0 per cent plus rate. There are visible infrastructure developments. But the reality is that the banking sector is facing difficult times and this is a serious threat for the economy. Many actors and factors working together have created this undesirable situation.
It is very natural that as the economy increases, the scope of corruption will also increase. This is why it is ideal for a responsible public finance management system to adequately prepare itself so that it can fight corruption and prevent money laundering.
Due to obvious reasons, the undeclared, untaxed money do not enter the banking channels. Either these remain hidden, go underground or into the informal economy. Under the circumstances, depositors, particularly public enterprises, become concerned about keeping their money in the private commercial banks. They rather prefer to keep their money in the government-owned banks. Liquidity crunch in the banks hinder the growth of banking transactions and business activities, which further aggravates the impacts on the economy. This situation may also lead to an increase in the interest rate, further increasing NPLs. This is the simplest explanation for the banking crisis that the economy faces at the time.
So, it is necessary to improve and strengthen the financial compliance issues so that the banks can face and overcome the liquidity crunch in the sector. In this regard, Bangladesh Bank should play its due role to protect public money and bring commercial banks under strict regulation to maintain a healthy ADR (advance deposit ratio), on one hand, and ensure smooth money supply to businesses and industries, on the other. Easy access to finance and a culture of timely repayment of loans should be created by reforming and updating the banking rules and regulations and ensuring strict monitoring by Bangladesh Bank.
Capital flight from Bangladesh is another reason behind the money shortage. As per report by Washington-based consultant Global Financial Integrity (GFI), capital flight from developing countries including Bangladesh was $600 billion in 2015. Bangladesh's share was $5.90 billion. This is alarming. Due to illicit transfer of money, the government is being deprived of due taxes on one hand and the country is being deprived of getting investments, on the other. The present situation demands an effective financial intelligence system and international tax cooperation to fight money laundering and, transfer pricing, and also to minimise 'Hundi' transactions. It is true that corruption and illicit money outflow from the country cannot be stopped overnight. But the collective efforts of the concerned regulators, law enforcing agencies, banks, tax authority and business associations can improve the situation and restore investors' trust and confidence in the banking sector.
Banking sector, money market and stock market are the most important organs of an economy. Due to corruption, inefficiency and lack of good governance, the banking sector could not be improved to the desired level as yet. Banks are run by the deposits of public money; but a few directors of some banks probably think that it is their own money and, as such, they often exert undue pressure on the bank's management to provide loans to persons and business houses close to them, without considering whether this can benefit the depositors. In a number of cases, such borrowers become defaulters. If such default cases increase and continue for long, banks may become insolvent placing the depositors in the short run and ultimately the economy in the long run in serious trouble.
In spite of government's direction and also commitment of the Bankers Association of Bangladesh (BAB), interest rate on bank loan could not be reduced to a single digit as of yet. This is due to the fact that Bangladesh's banks are adding around 4.0 per cent spread with the deposit rate to determine the lending rate and this is unjustified. Most of the banks of developed countries usually do not add any spread. Rather they raise additional funds by issuing asset-backed bonds using the papers and documents of the mortgaged properties of their lenders and mobilising the whole money to generate income by getting bank charges, commissions etc. While providing loans, banks should give more emphasis to increase commercial activities of the borrowers through banks and also open new avenues of banking services like factoring, forfeiting, discounting etc. to increase banks' income.
For long-term financing to industries and business, it is necessary to develop a trusted alternative source of finance other than bank and for this purpose, a vibrant bond market should be created and the capital market should be further strengthened. Financial Reporting Council (FRC) has been formed to bring accountability, transparency and ensure good governance in the banks, capital market and public finance management. But the progress of FRC is very slow. The prevalent situation demands that the activities of FRC be expedited.
The global rating agency Moody's has predicted that Bangladesh's banking sector may become weak in coming days due to decline in the quality of assets and lack of efficient human resources in the banking sector. Bangladesh Bank and the BAB should work together to develop efficient and trained workforces to run the banks ethically and with integrity. Bankers should also learn from the knowledge and experiences of banks in the developed economies.
Banking sector is the centre-point of economic activities of a country, but it is not isolated from the activities of the economic sectors. If the government cannot fight corruption and money laundering, the local banking sector will not be able to work properly. Side-by-side, the citizens of the country should also be encouraged to do financial transactions through banks and the on-going financial inclusion should be expedited. Crisis in banks should not be treated as an isolated issue; because it is an outcome of collective socio-economic issues. In this regard corruption plays the most important role.
As such, the first step should be to improve the governance system in the banks and implement banking rules and regulations strictly so that the depositors can regain confidence on the banking sector. Policymakers should also find effective ways through which undeclared money can be channelled to mainstream economy. A chance may be given to convert the undeclared and untaxed money into 'white'.
Money is the blood of national economy and as such, liquidity crisis in banks should be treated as a wake up call.
Abu Sayed Md. Shaykhul Islam is a professional Cost and Management Accountant,
President of Pallabi College and a former President of ICMAB
ishaykhul@gmail.com