Finance Minister AMA Muhith, while receiving a 'dividend cheque' from the BDBL (Bangladesh Development Bank Limited) management on December 21, was found to be very unhappy about the existence of 'quite a big' number of banks and made a broad hint at merging some of the new banks.
"The number of banks now is 56---quite big. I have nothing to say about it since it will shrink in natural course. Some will be merged. We need to be ready with merger and bankruptcy laws", Muhith said.
The next day, the Finance Minister, while inaugurating 10 new branches of the Mercantile Bank via video conference from a city hotel, found the existence of too many banks not that 'bad' for the sector as the banking services 'have expanded dramatically'.
One may find the two statements made on the two successive days to be contradictory. Yet, at the second function, he did not forget to mention about the issue of merger and acquisition (M&A). The minister noted that the government would complete the process of framing a couple of laws on bankruptcy and merger in the next two years for the betterment of the country's banking sector.
The fact remains that the country needs M&A and bankruptcy laws befitting to the needs of all sectors, including banking. For quite a long time, the necessity of framing such laws has been discussed, but nothing concrete has emerged as yet.
The Finance Minister has mentioned about framing the M&A laws within the next two years. But the job of framing the laws should be accomplished within a short time addressing all the necessary aspects of merger and acquisition.
For instance, this paper recently carried a story highlighting the issue that the government has been failing to cash in on the M&A of companies operating in Bangladesh. The M&A of two or more business entities always has financial implications and the government could claim some revenue out of the process. For instance, two cement manufacturing companies, La Farge Surma and Holcim, have recently merged. There are issues of capital transfer and the government has the scope of claiming some revenue out of the M&A in question.
Now, the question is who are the potential candidates of M&A in Bangladesh and why?
Undoubtedly, there are some potential candidates in the banking sector for M&A. These days, large commercial entities are hardly liquidated as they are either acquired by, or merged with, others of the same hue.
Many banking industry insiders tend to believe that the number of banks is quite big given the size of the Bangladesh economy. They are right if seen in the context of concentration of bank branches in urban centres, including Dhaka city. But had the banks gone to rural areas to extend their services to millions of people living there, they would possibly have reasons to justify their existence.
But the fact remains that banks are to do business and earn profit at the end of the day. They are not philanthropic organizations. The state-owned banks do have a large rural network and most of those are in the red. The banks are operating in those places since their owner wants them to do so. Decentralisation of power and transformation of upazilas as growth centres could have changed the situation and the banks, both private and public, would have found valid reasons to open branches in rural areas. But under the prevailing circumstances, banks should have no reason to operate in remote rural areas in the name of serving the 'unbanked' population.
Political considerations and pressures are largely responsible for an unreasonable expansion of the banking sector and poor financial health of the state-owned banks in particular. The BASIC Bank is a glaring example.
The industry did not welcome the move to allow nine new banks in 2013. Even the Ministry of Finance and the central bank were reportedly opposed to it. Yet the sponsors concerned, because of their political connections, got permission to open new banks. Barring one or two, most of the new banks are not in a good shape and some already have a substantial burden of non-performing assets. That is why the Finance Minister has raised the issue involving their merger. On close scrutiny, some second and third generation banks might also become strong candidates for M&A.
The situation is almost identical in the insurance sector that has operators, both in life and general segments, well beyond the need of the market. The glut of insurers has given rise to irregularities and unethical business practices. Even a tough stance on the part of the Insurance Development and Regulatory Authority (IDRA) has not proved to be much effective in reining in the errant insurers.
There is no denying that the insurance market needs consolidation and that should start with M&A involving the strong and weak operators in the sector.
In the developed world, companies volunteer in the matter of M&A. The process will eventually be the same also in Bangladesh. However, there should be a comprehensive law for the purpose so that the interests of general shareholders, in the case of listed companies, are not affected. The government should not make any further delay in this connection.