CPD IRBD study on economic cost of political turmoil cited

Shah Md. Ahsan Habib

Pointing fingers to ‘supervisory failure’ is not very uncommon while detecting any fund misappropriation or increase in the non-performing loans in the banking sector of Bangladesh. It is well-recognised that the bank supervisor or the central bank can play an effective role in preventing banking irregularities. None can deny the role and responsibility of the central bank for ensuring safety and soundness of banks. However, it must not be that straightforward.  Answers to some relevant questions are crucial to find the real areas of flaws or reasons for any mishap.

Can the supervisory authority alone prevent non-performing loans and irregularities? Should not the central bank demonstrate enough flexibility to accommodate itself to support businesses and the economy at the time of difficulties and crisis? Did not many central banks in Europe and US help the businesses cope with financial shocks in recent times? Are the internal control mechanisms of banks are adequately supportive to attain the supervisory objectives of the central bank? The write-up is an effort to get the answers to these questions in the context of Bangladesh.

We all are aware that the Bangladesh economy suffered heavy losses during the prolonged political unrest in the second half of 2013.  According to an estimation of the Centre for Policy Dialogue (CPD), shutdowns, blockades and strikes cost over US$ 6.7 billion which is equivalent to 4.7 per cent of the country’s GDP (gross domestic product).  These figures, according to the CPD, were related to only four major sectors- garments, transportation, agriculture and tourism. The ready-made garment sector was the hardest hit. This sector also saw overseas buyers’ orders falling due to political impasse and frequent labour unrest in a number of factories. Total cost of the political unrest must have been much above the estimated figure. This was no less than a ‘short-term economic and business crisis’. Business houses, especially small enterprises, were badly affected by the political turmoil. In such a circumstance, the Bangladesh Bank (BB) discussed business situation of the country with the top executives of banks, business houses, and other stakeholders. It offered a temporary opportunity to reschedule loans at less-than-required down payment and an extended time for instalment payment to support the business houses affected by the prolonged political unrest.

In order to cushion the impact of the disruptions on businesses, the Bangladesh Bank undertook important policy steps to broaden the scope of the Export Development Fund and to reduce the borrowing costs of genuine borrowers facing cash-flow difficulties. Banks were requested to be particularly aware of the difficulties of small and medium enterprises (SMEs).  This was indeed a very timely and logical step on the part of the central bank to encourage and support businesses of the country. And it is very usual to demonstrate such a flexibility to support the economy in such a difficult situation.

It is unfortunate that some unscrupulous business houses may have misused the flexibility and taken unethical advantage with the support of their respective banks. These were perhaps only a few exceptions.  However, a large number of businesses and banks have also benefitted from that. Moreover, these initiatives must have contributed to the recovery process of the economy from the mishap. The recent increase in the non-performing loans might be due to the ‘over-hang’ of earlier banking irregularities/scams and the difficulties businesses faced in repaying loans during the political unrest.

The rigidity of the Bangladesh Bank (BB) with regard to the enforcement of loan-classification norms during the period of political unrest could have delayed the recovery process of the economy. In this connection, it is worthwhile to mention huge bailout packages offered in a number of developed countries for saving their banks and economies in response to the global economic crisis of 2009-10. These supports may not be in line with the fundamentals of market economy.  However, these were essential to save their financial sectors and the economies.

We are aware that our banking sector witnessed a number of unethical practices and irregularities in recent times. The frequency and magnitude of such fraudulent activities left a huge burden on the banking sector and has impacted the public confidence to some extent and reputation of the banking sector. It is generally recognised that such types of unscrupulous activities cannot take place without the active collaboration or passive approval of a section of bankers. These were definitely the cases of the failure of internal control and compliance of the concerned banks.

It is well-recognised that no degree of supervision can prevent the irregularities altogether; it can reduce the probability only. This is because of the inherent nature of supervision where a time lag always exists before any irregularity can be observed by the supervisory authority. It is recognised that when an irregularity is detected by a supervisory authority, then it becomes too late to prevent that. Steps can only be undertaken for preventing future irregularities. This makes the internal control system the most effective mechanism to prevent any sorts of banking irregularities. It is for this reason that a strong internal control culture is recognised as the best defence against any unscrupulous transaction in the banking operation.

The concurrent nature of internal audit makes it possible for the banks to detect irregularities at an early stage. The central bank now is in full control of the banking sector. Had there been full authority over the board of the public banks, the central bank could have shown its strength in ensuring good governance in these banks.

Even with its limited power, the BB did not hesitate to first put an observer in the board of Basic Bank Limited and finally removed the MD for gross irregularities in that bank.

In recent years, notable changes have taken place in the regulatory and supervisory arrangement of the BB. Its supervision capacity has been strengthened through greater automation with information from the new e-monitoring system. The BB’s initiatives to implement Basel II framework is a praiseworthy initiative that has improved the risk absorption capacity of banks. However, we need more effective internal control and compliance systems and improved corporate governance practices in banks. The existing supervisory arrangement with a supportive and positive approach of the stakeholders would be able to deliver.

afm.asad@bb.org.bd