Black money has been dominating the economies of South Asia for a long time and its dominance in Bangladesh has increased in recent years. A study on the subject by researchers at the Bangladesh Institute of Development Studies (BIDS, 1997) revealed that over 40 per cent of the nation's economy (worth over Taka 500 billion or US Dollar 10 billion) was controlled by what it described as "informal economy"-often a euphemism for "black economy". The principal sources of black money were drug trafficking, smuggling and corruption. Johnson, Kaufman and Zoido-Lobaton (1998) found that higher levels of corruption were associated with a larger unofficial economy. And a study by the IMF estimated the size of the unofficial economy in Bangladesh to be in excess of 50 per cent and increasing during the decades of 1990s and 2000s.
The World Bank is engaged in a dialogue on financial sector issues with the Government of Bangladesh since 1988 and has identified three principal problems which afflict the financial system here - a deficient legal framework, poor governance and a weak central bank.
Despite recent gains in financial depth, the financial system in Bangladesh remains shallow and the sector's contribution to gross domestic product (GDP) has remained almost static for many years. Although policy reforms have been undertaken in the past, including deregulation of interest rates, strengthening of standards of loan classification and provisioning, and elimination of central bank's control over most financial transactions, the financial sector continues to be underdeveloped and inefficient; poor financial intermediation presents a significant disincentive to faster economic growth.
The legacy of corruption and malpractice in the banking sector of Bangladesh can be traced back to the pre-liberation era. Bent on rapid industrialisation and modernisation, the then Pakistani government provided liberal refinance facilities to specialised financial institutions, which were encouraged to loan out large amounts of money to emerging industrialists and large-scale agriculturists. There were then reports of borrowers bribing bank officials in cash or kind for obtaining credit. Large industrial credit required political patronage, some of which was thought to have a price tag attached to them. Insider lending was a common phenomenon among banks, as was the use of bribes to mobilise scarce deposits from owners or controllers of official funds.
After the independence of Bangladesh, all private banks, except the foreign ones, were nationalised and brought under the direct control of bureaucrats. The acute shortage of manpower in the banking sector compelled the government to go for hasty quota-based recruitments. The prolonged government ban on new recruitment of officers (upon pressures from the trade unions), even when the branch networks were expanding, created pressure for promotion from among the clerical ranks. This led to a decline in the average quality of banking manpower.
The government policy of mandated credit for agriculture, which was disbursed through local-level government officials and rural power elites practically institutionalised corruption in agricultural lending. As a matter of routine, dishonest bank officials took a cut of 10 to 20 per cent from the loan amounts.
Industrial borrowers also defaulted on loan repayments to development finance institutions (DFIs) and nationalised commercial banks (NCBs), emboldened by their close links with a nexus of corrupt politicians and bureaucrats. Subsequently, the defaulters extracted concessions in the form of interest waivers, segregation of loans into 'blocked accounts', and repeated rescheduling. Some defaulters were even alleged to have used the defaulted funds for launching private banks and insurance companies during the 1980s.
BANK LOAN DEFAULT: A 2000 study on the problem of bank loan default found that among a sample group of 125 defaulters, 78 per cent had used political connections to get loans. Among the 37 per cent directly involved with the ruling party, a large proportion had switched political allegiance at least once. The political patronage enjoyed by the loan defaulters and corrupt bankers was sufficiently strong to prevent the then Bureau of Anti-Corruption (BAC) from investigating suspected officials without the clearance of Prime Minister's Office (PMO). However, despite a powerful defaulters' lobby in parliament, some new laws have been enacted during the decade of 2000-2010 to fight the loan-default culture in the banking sector of Bangladesh.
It is very difficult to obtain reliable estimates of bribery, fraud and forgery in the banking sector due to the high degree of secrecy maintained by the concerned parties. However, it is estimated that the cumulative losses through frauds and forgeries up to November 1998 was Taka 1.0 billion or 0.2 per cent of total bank deposits. Bribes for agricultural loans were said to range from 10 per cent to 20 per cent of the loan amount; but a lower rate (2.0-10 per cent) was said to be applicable for larger loans that are usually taken by influential borrowers.
Bribes collected by bank officials in case of project loans were sometimes shared with local-level project officers. In case of commercial loans, the bankers not only collected outright bribes (1.0-5.0 per cent of the loan amount), but also received occasional gifts, hospitality or entertainment from the clients. Bribes ranged from 1.0 per cent to 5.0 per cent in case of term loans depending on various attributes of the project. Working capital loans involved a payment of 1.0 per cent to 5.0 per cent of the credit to bank managers, employees and trade union leaders.
According to the National Household Survey on Corruption in Bangladesh conducted by Transparency International Bangladesh (TIB) in 1996, 25.7 per cent of the bank borrowers reported receiving an amount lower than the sanctioned amount. About 45 per cent reported obtaining loans after making payments to bank employees, while 9.0 per cent reported getting loans with the help of influential people or middlemen. About 73.5 per cent of the respondent households agreed that it was almost impossible to get credit from banks without money or influence.
The report on the National Household Survey on Corruption in Bangladesh published by TIB in 2005 claimed that it took 108 days on an average to obtain loans for those who had applied for loans from state-owned banks. The same figure for borrowers of private banks was only 30 days. The survey also showed that 58 per cent borrowers had to pay bribes for obtaining loans. Of them, 61 per cent took loans from the state-owned banks, while 15 per cent had borrowed from private banks. However, whereas average amount paid as bribes in state-owned banks was Taka 1,764, the amount was Taka 12,200 in case of private banks. Around 43 per cent of the respondents blamed bank officers for the bribery, 21 per cent blamed bank employees for the offence, 15 per cent blamed the managers, while 24 per cent had paid bribes through middlemen.
According to the National Household Survey 2007 on Corruption in Bangladesh conducted by TIB, 32 per cent among the loan recipients from banks had to pay bribes for getting loan. However, bribery was reported to be much higher in government-owned banks (36 per cent) than private banks (7.0 per cent). Borrowers paid Taka 5,071 on an average as bribes while receiving loans, which was 7.6 per cent of the loan amount. Among the bribe-payers, 43 per cent reported that they had paid bribes to concerned officers, 18.1 per cent reported having paid bribes to branch managers, while 19.9 per cent made payments to employees of the banks; another 18.7 per cent channelled bribe payments through brokers or middlemen.
The problems currently faced by the financial market in Bangladesh include: (a) an unsustainable level of non-performing loans (NPL) - probably the highest (excluding Pakistan) in South and Southeast Asia; approximately 10 per cent of the outstanding loan portfolio is non-performing; (b) a low loan recovery rate; (c) an inability on the part of many local banks to meet the capital adequacy requirements; (d) high level spreads between lending and deposit rates reflecting systemic inefficiencies and portfolio problems; and (e) rampant insider lending and fraudulent behaviour.
IMPLICATIONS FOR THE FINANCIAL MARKET: This dismal state of affair has implications for the financial market of Bangladesh. Payments for bribery and undue rents at the time of investment in a project and also during its operation are cash outflows that reduce a project's value to the investing firm. First, it reduces actual cost of the project. Second, subsequent rents payable during operation again reduce a project's cash income. Both ways, a portion of the value created is confiscated by the corrupt elements in the sector. To make up for the lost value, an investor expects a premium over and above the normal returns obtainable from an investment. Given that these returns Rf (Risk-free return) and Rm (Return from a market portfolio) are higher, the Capital Asset Pricing Model (CAPM) predicts higher required returns (Rj) for an investment. Thus investors in countries like Bangladesh where corruption is all-pervasive would expect higher returns to compensate for the loss of value due to corruption in order to make their investments viable.
Now, value can be defined as the present value of future cash-flow earnings from an asset. There exists an inverse relationship between Net Present Value (NPV) and Cost of Capital (K). Hence, a financial market afflicted by all-pervasive corruption will have a relatively higher K and consequently lower NPV from investments. As a consequence, investors will prefer to invest in an economy affected less by corruption, even after adjusting for the lower cost of labour in Bangladesh. This is exactly what has been happening here.
ANARCHY IN THE STOCK MARKET: It is alleged that rampant corruption and manipulations also exist in the stock market of Bangladesh. The ignorance of the general public and misinformation about the market are made good use of by the manipulators on a regular basis. As a result, little correlation is found between the share prices and company profiles (such as earnings per share, dividend per share etc.). The share-scam of 1996, dubbed the "slaughter of the innocents", can be cited here as an example. In June, 1996, when a new government came to power in Bangladesh, the All-Share Price Index of Dhaka Stock Exchange (DSE) was 959.05, up from 805 on 31 March 1996. Restrictions on remittance of profit and capital as well as tax on capital gains were already lifted by the previous government. And when the newly installed government withdrew a one-time lock-in period for investors and allowed 80 per cent loans against share investors, it opened a flood-gate for manipulators in the stock market.
The index crossed the all-time high mark within July 1996 and on October 01, the DSE index reached an astounding level of 3688.88. There were already cries in the media about foul-play, but the manipulators did not stop there. The stock market and the kerb-market virtually turned into a bazaar in the centre of Dhaka city and people in the rural areas even started to sell their lands with the hope of making quick bucks. The initial public offerings floated by even suspect companies were heavily oversubscribed. At the end of October, the DSE index had reached the astronomical level of 3012.97, but the euphoria of the public and the greed of the manipulators did not stop there. On November 16, the DSE index reached an unbelievable height of 3627.01, surpassing most stock exchanges in South and Southeast Asia. And at that very juncture, after the manipulators had made huge windfall gains -- which are possible only once or twice in a lifetime -- the bubble burst and the collapse began reducing many of the unsuspecting speculators to the state of paupers. By the end of November 1996, the index fell to 3012.97, and on December 31 it was recorded at 2300.15. Between November and December, 1996, market capitalisation of Taka 23. 5 billion just vanished in thin air. Evidences emerged later that apart from brokers and dealers, even people within the Securities and Exchange Commission (run by the bureaucrats) and the management of Dhaka Stock Exchange allegedly played the roles of abettors in this share-scam of the century.
The slide continued for years together. By the end of June, 1997, the DSE All Share Price Index had fallen to 1111.55 and another Taka 40 billion of market capitalisation had just vanished from the bourse. In June, 1998, the index came down to 676.47 and since then hovered around 500 for a long time after touching the bottom of 473 in December 1999. After that, it took another decade for the market to recover before another similar collapse was orchestrated in 2010.
CONCLUSION: In terms of financial market development, Bangladesh's global ranking fell sharply in recent years - from 66th in 2010-11 to 90th in 2015-16 (World Economic Forum, 2010 & 2015). Availability and affordability of financial services, ease of access to credit, soundness of vision and mission, operational efficiency, standards of management and good governance, regulatory measures guiding the financial sector, state of the securities market - all these indicators demonstrate a deteriorating trend in terms of performance. Also, the capital market is yet to gain the image of a reliable investment platform and is faced with numerous systemic challenges. In addition, the fact remains that the correlation of widespread corruption to financial and economic ills in developing and emerging markets like Bangladesh is indeed very high. All these pose a serious challenge for both as local and foreign private investors who are interested to get involved here. But the roots of corruption are deeply embedded in the historical, social and cultural moorings of a nation, and unless the value system is addressed properly, the situation is unlikely to improve much in the near future.
A former editor of Bangladesh Quarterly, Dr. Helal Uddin Ahmed stood first in MBA with major in finance at IBA of Dhaka University, and later earned master's degree in government financial management from the University of Ulster, UK.
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