The decisions of the government that came to light after a recent closed door meeting with the Bangladesh Association of Banks (BAB) would illustrate amply well how weak the country's economic and financial governance has become.
In the wake of meeting with the BAB, the statutory requirement of cash reserve ratio (CRR) by the country's commercial banks for maintenance with the central bank -- the Bangladesh Bank (BB) -- has thus been decreased.
At the same meeting, the BAB requested for raising the level of the deposits of the state-agencies with private commercial banks (PCBs) from 25 to 50 per cent. It also urged the government to stop 'negative reporting' in the country's media on the banking sector.
In recent weeks, it has been evident that the relations between the regulators and entities to be regulated have been reversed. Bangladesh Association of Banks (BAB) that mainly represents the sponsors of private sector banks, seems now to have become the most important factor in decision-making in pursuit of policies in the banking sector. Such policies affect the 160 million people of the country. Objectively speaking, it is a great achievement for a private association of its kind to have such an influence over the country's monetary and banking sector-related policies. In contrast, the banking sector regulatory body and the ministry of finance both can perhaps "celebrate" the delegation of their respective functional responsibility for maintaining proper control over the banks and finances of the country. The systemic loss of control from government side and peoples' loss of trust in the banking sector are positively co-related.
It does not even require a quantitative analysis or analyst to identify the problems in our banking system in terms of risk management and solvency issue. Such problems are not quantitative. These are rather management-related ones. The liquidity crisis and other systemic issues are due to lack of sound governance, transparency and accountability. The quantitative measures in the country are triggered by political factors which eventually translates into, what the ordinary citizens, on real or perceived grounds, consider to be, systemic 'thievery' of peoples' money through the banks. The last fiscal budget earmarked Tk 20 billion for bank recapitalisation; the upcoming fiscal budget will do the same. Economists, financial analysts and experts have repeatedly confirmed through data and evidence that recapitalisation, without enforcing compliance and punitive measures, will not resolve the problem of non-performing loans (NPLs). Rather, the continuous recapitalisation for the last 10 years which amounts to almost Tk 145 billion (14500 crore), condones the loan defaulters to continue 'the practice of looting'. The banking sector is going through a liquidity crisis. This crisis is not only a recurring pattern but also will become much worse this year due to election-time economic behaviour.
The recent decision to decrease the CRR from 6.5 to 5.5 per cent is a quantitative easing measure that directly opposes the current monetary policy. The justification from the government side is that this will bring down the lending rate and help address the liquidity crisis! The numbers and historical trends tell us otherwise. This is a quantitative measure, indeed. But its results and intentions will not be quantitative, especially given Bangladesh's current context. Providing such leverage to private and state-owned banks does not translate into lower lending rates as the pass-through rate in Bangladesh is very slow and, in some cases, indifferent. Rather, the monetary loosening measure will decrease the deposit rates compared to the lending rates. Finally, the biggest caveat of such measures is that it allegedly encourages a section of bank owners to continue to siphon off state's funds through the banking channel.
These proven facts and events confirm that Bangladesh Bank (BB), as the primary governing body for banks, witnessed a 'dilution' of its independence, after the inception of Banking Division within the Ministry of Finance. The final chapter of this regulatory role-reversal was confirmed after the recent meeting between BAB and the finance minister, with the former (BAB) calling the shots.
A good number of 'owners' of private commercial banks and also the management authorities of state-owned banks appear to be using the system to frolic with depositors' money. The flight of capital increases in an election year; the recent decision by the government to inject more liquidity through quantitative measures will not also resolve the liquidity crisis. Rather this additional liquidity may facilitate more capital flight. The moral hazard of such practices to continue will, in all likelihood, adversely impact the country's long-term economic prospects.
The government is celebrating Bangladesh's possibility of coming out of the LDC (Least Developed Country) status. But that status is still six years away; in order to achieve that status, Bangladesh needs to diversify its exports, develop human resources and build a resilient social-industrial infrastructure. All these will require a high volume of foreign investments. On their part, investors will like to feel themselves quite assured of a sound, regulated environment for their funds. Moreover, the financial system also needs to ensure accountability, transparency and punitive measures, being enforced by the government to curb corrupt practices. The country's current standing, based on all relevant variables, is still not impressive. In some cases, the scenario presents an anathema from a risk management perspective. The current state of affairs in the banking system is overwhelmingly governed by both politicised elements and legally identified financial delinquents. Unless the government does not pro-actively take steps to improve this environment, attracting domestic investment to the desired extent is a far cry, let alone foreign direct investment (FDI).
The policy decision regarding CRR will bring almost Tk 100 billion into the country's banking system this year. This ironically matches the annual loss of the banking sector due to inefficiencies. In a recent seminar, organised by South Asian Network on Economic Modelling (SANEM), it was reported that the country loses 1.0 per cent of its gross domestic product (GDP), amounting to Tk 100 billion annually, due to inefficiencies of its banking sector. The participants in the seminar also highlighted that the recent quantitative measures to address the current liquidity crisis would lead to a bigger crisis. The government is knowingly allocating the tax payers' hard earned money to be used for bank bail-outs in a situation where the money, lent out by banks through aggressive loans, can continue to be siphoned off, with or without connivance of banks and other authorities concerned, through "mispricing" or other devious means. Such credits, without their use for the purpose for which the same are sanctioned and disbursed, do line up pockets of the vested interests. Foreign and local investors critically observe these happenings in the emerging and developing countries. In recent years, Vietnam received six times the FDI amount that Bangladesh received during the period and Myanmar, almost four times. The banking system in those countries are not perfect but the overall investment environment and banking sector there, as available indicators show, are comparatively sound. Our policymakers should consciously ask themselves: Given the option, would an investor invest his or her capital in Bangladesh?
It is all the more sordid here to note that the same vested interests are making pleas to the enforcer for censuring that the media refrain itself from reporting about their financial irregularities. If such pleas are accommodated, then that will tantamount to letting the tail to wag the dog in our banking system. If the gross irregularities in the country's financial sector are not fixed on an urgent basis, it will be a mere pious wish to expect foreign investors to make investments in the economy.
Safwan Rob is an Archer Fellow, Lee Kuan Yew Scholar.