Published in The Daily Star on Monday 24 February 2020
Recent newspaper reports indicate that the finance minister is taking an initiative to form a Banking Commission. This is a welcome move.
In view of the deteriorating performance of the banking sector, the Centre for Policy Dialogue (CPD) has brought the issue of improving the governance of the sector in the public domain through in-depth research and dialogue. Back in 2012, following the Hallmark scam in Sonali bank, CPD urged the government to set up an interim banking commission. CPD repeated this demand in all its discussions on the macroeconomic situation of Bangladesh that are carried out quarterly.
However, there has been no response from the policymakers. The former finance minister said several times that he would set up such a commission—but nothing was done. The current finance minister also talked about reforming the sector and the need for a banking commission. In his budget speech for fiscal year (FY) 2019-20, he said that he would examine the possibility of forming a banking commission. Before the national elections in December 2018, the present political party in power made a number of commitments regarding the banking sector in its election manifesto. Among those pledges were the intention to reduce non-performing loans (NPLs) and improving the efficiency of the banking sector.
In reality, instead of a recovery in the health of the banking sector, it is being pushed towards a crisis. In September 2019, the amount of NPL was equivalent to about 12 percent of the total outstanding loans in banks. The actual amount of NPLs could be double if amounts of write-offs, money stuck in Money Loan Court and rescheduling of special mention accounts are taken into consideration.
About 51 percent of total NPLs are in the state-owned commercial banks (SCBs) and specialised banks (SBs), while 47 percent is in the private commercial banks (PCBs). Other indicators also reveal the weakness of the sector. The SCBs could not maintain a minimum total capital adequacy ratio of 10 percent in 2019. The expenditure-income ratio is high, both in the SCBs and the PCBs. To put it simply, for earning one Bangladeshi taka, the SCBs have to spend 80 paisa, the PCBs have to spend 77 paisa and the foreign commercial banks (FCBs) have to spend 45 paisa. On the other hand, returns on asset in the SCBs is negative implying that they are exhausting their capital. The average standard is that every Tk 100 should be able to make a return of Tk 2. The return on asset in FCBs is 2.6 percent. But for the SCBs, it is (-) 0.8 percent and for the PCBs it is 0.7 percent.
On the other hand, bad borrowers are being rewarded through various favourable measures which could demoralise the disciplined borrowers. Therefore, if the finance minister can walk the talk, it will fulfil the demand of CPD and other citizens. But there are several issues attached to an effective commission. These are summarised through seven points.
First, the objectives of the banking commission should be very specific. These should be to: (i) critically assess the overall situation of the sector; (ii) establish transparency regarding data and information on the sector; (iii) detect the root causes of the problem and possible future challenges; (iv) identify which groups and institutions are responsible for the crisis of the sector; and (v) make meaningful and specific suggestions on administrative, regulatory and structural reforms for the short and medium term.
Second, the duration of the commissions should be timebound and short. It should not exceed three to four months so that the government can start implementing the recommendations soon after the budget for FY 2020-21.
Third, the commission should adopt an inclusive and participatory methodology to prepare its report which should involve: (i) desk research based on existing data and information; (ii) separate meetings with select group of people; (iii) expert consultations; (iv) organisation of public dialogues and hearings; and (v) exchange of views with all stakeholders that include policymakers, entrepreneurs, general customers of banks, small and medium businesses, small savers, experts, bank officials, economists, representatives of organisations related to banks, women, youth, representatives of grassroots organisations and media.
Fourth, the transparency of the commission should be established through sharing the progress of its activities with people on a regular basis. Interim reports should be prepared and shared with citizens. Draft report of the commission should be uploaded on website for comments by people.
Fifth, members of the commissions should be competent, experienced, honest and unbiased—who will be able to deliver the task with the highest professionalism.
Sixth, the commission should be allowed to work independently without any external influence.
Seventh, the government should have a strong commitment and a clear roadmap as to when and how the suggestions of the commission will be implemented. The government should make full disclosure on whether recommendations are being implemented properly and what have been the outcome of such measures in the banking sector.
Undoubtedly, in the past the banking sector has contributed towards expansion of trade and business in the economy. Bangladesh government started the liberalisation process through denationalising the nationalised commercial banks in the 1980s. The reform process continued during the 1990s and the 2000s under the directions of the World Bank and the IMF.
In addition to these reforms, the National Commission on Money, Banking and Credit was constituted in 1984. In 1996, a banking commission and in 2002, a banking reform committee were formed. In 2003, the Central Bank Strengthening Project was carried out for a strong and effective regulatory and supervisory system for the banking sector. The Bangladesh Bank Amendment Bill 2003 was passed in the parliament, through which Bangladesh Bank received the autonomy to operate on its own. Unfortunately, Bangladesh Bank has totally lost its independence, despite such a mandate.
The success of this banking commission is contingent upon strong political commitment. The commission can play an effective role to improve the banking sector only if the commission is allowed to work without political interference.
As conscious citizens of the country, we shall closely monitor and give opinions on the formation process of the commission, its activities, its recommendations and their implementation.
Dr Fahmida Khatun is the Executive Director at the Centre for Policy Dialogue.