The economic transformation of Bangladesh over the last decade has been well-appreciated by the development community. Its performance in improving key development indicators such as reducing extreme poverty or increasing life expectancy means that not only has Bangladesh reduced the acute burden of deprivation for a large share of its population. The overall progress has allowed the country to position itself favourably to qualify as a lower-middle income country in the next few years.
Of course, this economic leap also makes it critical for existing policy-makers to understand and address challenges that are likely to emerge as our economy modernises with time. Without any attempt to foresee the source of future risk, we will be gambling with prospects of our future generation. In this context, an area where urgent attention is most needed is the state of the banking sector in Bangladesh.
The global financial crisis post-2008 is a reminder of the fact that without a well-governed banking sector, any modern society faces the threat of a grave economic meltdown. It is widely accepted by international policy-makers and academics that the global financial crisis of 2008 is a manifestation of poor regulatory frameworks within industrial countries, which failed to offer appropriate oversight of risk-taking behaviour within the financial sector. Consequently, an important lesson tied into this global economic crisis is that, for sustaining economic progress within developing countries, it is essential to scrutinise the performance of the financial sector so that mistakes or irregularities plaguing the global financial health are not repeated within the emerging world.
As a result, policy-makers in Bangladesh must undertake reforms across legal and regulatory institutions that help sustain progress. A stock market crash in 2011 followed by numerous banking scams have raised serious concerns surrounding the capacity of the regulatory institutions in offering effective oversight and legal redress to the key actors within the financial market.
As of June 2015, overall bad loans in the country have crossed the $7bn threshold and gross non-performing loans within state owned banks are over 20%. Additionally, between 2013 and 2014, the government has cumulatively provided more than $1bn for recapitalising state banks. Needless to say, every dollar spent on recapitalisation of poorly functioning state-owned banks is a dollar less for expenditures on health-care or education.
Thus, if such governance deficits go unaddressed, then serious doubts are likely to emerge in the long-run health of the overall banking sector. Most importantly, any banking sector crisis will severely undermine the capacity of the sector to play its role in intermediating savings of the private and public sector to investments and other productive activities.
On the whole, to mitigate such risks, a large set of short-term and long-term financial sector reforms are necessary in order to reduce sates bank’s exposure to bad loans. The Seventh Five Year Plan of Bangladesh presently aims to reduce Gross Non-Performing Loan in state-owned banks to 10% by 2020. This, I believe, is a sound objective, but it necessitates implementation of tough regulatory reforms, two of them being:
Autonomy for Bangladesh Bank
It is extremely crucial for the government to review the issue of the independence of Bangladesh Bank and facilitate the conditions for it to become an effective autonomous regulator. A fully autonomous regulator empowered with the authority of hiring quality staff, procuring the technology it requires, strengthening its effectiveness, and implement prudential norms without the fear of political influence is essential to prevent financial irregularities observed during 2009 and 2014. An effective and autonomous Central Bank is also essential to formulate and implement sound monetary policies.
Supervision of public banks
The government needs to conceptualise a strategy and implement measures for effective supervision of public banks. There is no doubt that poorly performing public banks with bulky non-performing portfolios are a severe threat to the banking sector.
Hence, policy-makers must urgently ensure that these banks are brought under the regulatory supervision of Bangladesh Bank and will be required to comply with all prudential norms, including certification of the bank boards and senior management as per an internationally accepted criteria.
There is little ambiguity, however, that these institutional prescriptions will only be effective if there is an effective consensus within key policy-makers that the banking sector is an extremely dangerous zone, and any lackluster approach to governance can have catastrophic consequence for our development journey. So far, Bangladesh Bank has been able to bite the bullet and manage the existing bad loans, but let us not be complacent in thinking that we will always face manageable threats in the future.
