A strong financial market is a precondition for development of any economy. Financial market is basically split into two sectors -- money market and capital market. Money market is mostly represented by the banking sector while capital market is represented by stocks and bonds.
Both types of markets are equally important for economic development. Although business enterprises in developed countries largely depend on capital market to meet their fund requirement, in Bangladesh they (enterprises) mostly depend on money market, especially on the banking sector to meet their fund requirements.
Until 2010, the banking sector was found organised and stable but since then, a series of scams started to be unveiled one after another that included the Hall-Mark scam of about Tk 40 billion in Sonali Bank in 2012, Bismillah group scam of Tk 11 billion in Janata Bank in the same year, Destiny Group scam of almost Tk 40 billion in Basic Bank in 2013. These undesired events certainly had negative impact on the overall banking sector and as an inevitable fall out, the sector became fragile.
Moreover, approval of eight new banks in 2013 further worsened the situation. Although up to the year of 2015, bank branches per hundred thousand adults in Bangladesh were 8.37 which is fewer than in India (13.55), Sri Lanka (18.58), Pakistan (10.04) and Malaysia (10.66). The ratio has gone up as in 2016 and in 2017, the newly-approved banks opened a number of branches across the country.
All these scams, recent increase in non-performing loans, and drastic fall of private sector investments resulted in the poor performance of the banking sector. Indeed, banks are now struggling to make profits.
Against this backdrop, government's planning to give permission to three more new banks has obviously sent a shockwave to this sector. Justifying the decision, the finance minister said, since many people of the country are still unbanked, the country needs more banks in order to include them. Earlier in 2013, at the time of giving licence to 8 new banks, he mentioned that approval of new banks was a political decision.
In Bangladesh most of the unbanked people live in rural areas. In the city areas, unbanked people are mostly slum dwellers or other poor people who have no savings as they live below poverty line. These unbanked people are undoubtedly not able to offer any business to banks.
Will these newly approved banks attempt to include such people? This scribe doesn't think so. Bank is a commercial organisation. They always seek profit. In addition, it will not be cost-effective to serve such poor people through opening branches in rural areas. Rather, they can serve them through cost-efficient means like mobile or agent-banking and for this, we need not to set up new banks as the existing banks can do it fairly well.
Each of the existing banks has more or less 100 branches. The number is below their limit. So they can comfortably raise the number of branches to extend their services to unbanked people, if they feel like.
Our banking industry is now very much competitive and passing through a very tough time. In this circumstance, the new banks would face a tremendously competitive environment triggering an unhealthy competition among them. Understandably, in order to overcome the situation, banks will be forced to go for aggressive banking causing a further rise in their non-performing loan portfolios. This is evident in the recent surge of non-performing loans in the banking sector.
Some economists observed that political influence should not be the basis for getting approval of new banks. They pointed out that the last generation banks which got approval under such consideration were instrumental in putting the banking sector in a bad shape. But I don't think so. Earlier, almost all the banks in Bangladesh got licence on the ground of political considerations. Except one or two, all of those were doing very well until 2010. So, performance of a bank is not linked to whether the bank gets approval politically or not.
In fact, poor performance of the new banks is largely caused by their poor management and corrupt practices of their sponsors. Bangladesh bank was supposed to monitor the activities of such banks strictly but they failed to do so due to the association of powerful politicians with such banks.
Financial institutions like banks mainly exist on the trust of customers. Any deviation will severely cost not only the concerned banks but also the industry as a whole-- as is evident in the case of Farmers' Bank.
After Farmers' bank scam hit the headlines, depositors of not only this bank but also of other new banks started to withdraw their deposits out of panic.
The government should not politicise all institutions, particularly financial ones. There are many other ways to do favour to party men and providing them with a licence to open a bank should not be one of those. Foreign investors also show reluctances in dealing with a bank if they know that the bank management has link with political elements.
Banks are to open nostro accounts in foreign currency in other banks to facilitate international transactions. After 9/11, USA imposed some restrictions on opening nostro accounts by banks from other countries which have political affiliation. So, politically-approved banks are already in troubles in dealing with foreign trade.
The finance minister also mentioned the other day that if any bank fails to survive in the competitive market, it would be merged with another good bank or financial institution. But the question remains-- will a good bank agree to have a poor bank merged with it?
On the other hand, merger or corporate restructuring is not the ultimate solution to the problem as these do not always work well. The ICB Islami bank, BDBL are two examples. Moreover, merger gives negative signal to investors as they think that a bank does not want to get merged if it is in good shape.
Recently, we observe another tendency. Various government institutions have been demanding separate banks for their own. In response, the government has already given approval of Trust bank to Bangladesh Army, Shimanto bank to BGB, Ansar VDP Unnayan bank to Bangladesh Ansar and Village Defence Party. The government has already given green signal to Bangladesh police to set up a new bank for them. According to newspaper reports, Bangladesh Air Force and Bangladesh Navy have also applied for their own banks.
If this practice continues, different cadres of Bangladesh civil services may demand their own separate banks. If so, how will the government ignore them?
It seems that all but the government are realising that banking sector is passing hard times due to mismanagement, rise in non-performing loan, lack of regulation. It is a common phenomenon, especially in the state-owned and new banks.
All state-owned banks have huge capital deficiency. In the last several years, the government had injected around Taka 70 billion into the public banks to meet up their capital deficiency.
The government is not taking any action against wrongdoers in the industry, rather they are rewarded. This practice encourages the wrongdoers as they realise that government will not take any action against them.
So, instead of giving new banking licences, the government should concentrate more on putting the existing banking system in order. If the central bank and the government fail to take right measures in time, the situation will deteriorate further.
The writer is a capital market researcher and Assistant Professor, Department of Finance and Banking, Islamic University, Kushtia. [email protected]
