Bangladesh is one of the fastest growing south Asian countries with a CAGR of 5.6% in the last ten years and has the vision to reach upper-middle-income country status by 2021. This growth was accompanied by a significant decline in poverty, an increase in employment, greater access to health and education, and improved basic infrastructure. As a result, the once poor country is now considered middle income[1]. The existing finance-growth literature shows the relative importance of finance on economic growth. Banking sector dominates the financial sector development as capital market has not yet developed (Beck and Levine, 2004; Levine, 2005). Bangladesh has experienced tremendous growth in banking industries after financial liberalization policy in 1990s[2]. Domestic credits to the private sector by banks have increased from 2.61% of GDP in 1974 to 44.26% in 2016. After economic reform and financial liberalization in the nineties1the economy has started to grow even faster[3].
Figure 1: Finance and economic growth of Bangladesh
The financial sector of Bangladesh has been experiencing a period of stagnation due to macroeconomic and political instability. The non-performing loans (NPL) in the banking sector increased by Tk11,237 crore in the first three months of the current year. At the end of March, the total NPL stood at Tk73,409 crore which is 10.53% of total outstanding loans. Excess liquidity in the banks stood at Tk1,22,073 crore at the end of 2016 while it was Tk1,20,679 crore in 2015[4]. Declining non-interest income[5] indicates banking sectors heavy reliance on interest income. Consequently, interest rate spread (IRS) has started increasing since 2013. On top of that, the recent Banking Companies (Amendment) Act-2017 could add insult to injury[6].
A gloomy scenario banking sector stability in Bangladesh
2012
|
2013
|
2014
|
2015
|
2016
|
|
Bank capital to assets ratio (%)
|
5.42
|
6.04
|
5.85
|
5.43
|
---
|
Bank nonperforming loans to total gross loans (%)
|
9.73
|
8.64
|
9.37
|
8.40
|
9.20
|
Bank liquid reserves to bank assets ratio (%)
|
11.69
|
12.49
|
11.17
|
14.47
|
15.40
|
Net Interest Margin
|
4.54
|
3.73
|
2.29
|
2.34
|
---
|
Source: World Bank IBRD-IDA, GFD and Bangladesh Bank Financial Stability Assessment Report
On top of the above given scenario, we argue that changes in bank corporate governance structure could lead to the family-dominated board of directors who would definitely work for their own interest. This may increase huge ownership concentration risk as well preferential credit disbursements for directors’ favorite and own business group. On top of that, this new practice could trigger an even significant increase in NPL which would ultimately lead to capital erosion[7] and banking failure. Moreover, decreasing interest rate, excessive liquidity, unfair competition and market saturation could trigger massive banks’ failure which would affect not only financial sector but also the real sector of the economy. In the current macroeconomic situation, this is not a very unlikely scenario. Banks are currently sufferings excess liquidity risk due to lack of investment opportunities and political stability.
This is only the asset side risk. There is liability side risk as well. Due to lower inflationary expectation, the Central Bank has adopted the expansionary monetary policy to boost investment activities to stimulate output. Consequently, public and private commercial banks have already reduced their deposit interest rates which lead to deposit outflow from commercial banks to government's savings certificate where the interest rate is still significantly higher. Political pressure and upcoming election are the main two reasons of this policy inconsistency. In the short run, banks may not face any problems due to already excess liquidity situation but gradual decline in term deposits due to lower interest rate and lack of public confidence accompanied by the increase in NPL would significantly reduce bank lending capabilities and bank stability. One of the potential consequences in this dire scenario is increasing bank M & A[8]. Therefore, it is recommended that financial regulators must take proactive measures in order to prevent the financial distress in the first place by imposing strict regulatory control and improving corporate governance. Furthermore, in the current economic situation, if the central bank issues new license to open more banks under political consideration, it will be detrimental to the overall economy.
Since financial liberalization began, Bangladesh has not experienced any major banking crises but it does not mean that it is not going to happen forever. We have seen the havoc of banking crisis all over the world which destroyed the poor and made rich more richer. Fractional reserve banking, in simple language greed of rich, and unregulated banking industry are two main causes of the banking crisis. When the bank gives money as a credit that it actually does not have, then situations arise when it cannot pay the demands that are made upon it. Finally, I would like to conclude by quoting a prominent economist Dr. Asad Zaman:
"If we look at the benefits from banking, and compare them to the costs, it is very clear that on the whole the Western world has come to a great deal of harm as a result of this banking system."
[1] Asian Development Bank, Bangladesh: Challenges and Opportunities in Moving to Upper Middle Income Status. Retrieved on 26th November, 2017 from https://www.adb.org/news/features/bangladesh-challenges-and-opportunities-moving-upper-middle-income-status
[2] Financial Sector Reform Program (FSRP)
[3] Bangladesh enjoys a CAGR of 4.8% and 5.6% from 2000 to 2016 and from 2007 to 2016 respectively
[4] Bangladesh Bank Financial Stability Assessment Report April-June, 2017
[5] Non-interest income is bank and creditor income derived primarily from fees including deposit and transaction fees, insufficient funds (NSF) fees, annual fees, monthly account service charges, inactivity fees, check and deposit slip fees, and so on.
[6] The proposed amendment allows the doubling of the number of directors (currently 2 members are allowed to seat on the board from the same family) in a bank's board from a single family and extends the tenure of directors (As per the proposed legislation, the tenure of bank directors would be extended to nine years from the current six years).
[7] Nine banks, including four state owned commercial banks, have faced serious capital shortage due to high NPLs. Retrieved on 5th December, 2017 from https://thefinancialexpress.com.bd/economy/bangladesh/nine-banks-capital-shortfall-swells-to-tk-177b-in-q3-1512326793
[8] In a very recent public gather Finance Minister turning down the notion of a messy situation in banking sector riddled with irregularities and lacking good governance,. He said the banks failing to operate properly will go for merger. Retrieved on 28th November, 2017 from http://www.thedailystar.net/country/bangladesh-three-new-banks-get-licenses-government-finance-minister-ama-muhith-1497235
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