Believe it not: Politicizations of the banking sector

Abdullah A Dewan

The pressure to approve licenses for new private commercial banks (PCB) by defying initial objections of Bangladesh Bank (BB) and those of economists are deemed as a blatant act of politicization of the banking sector of the country. Such an intrusion into the life line of a country’s financial sector through brute and overpowering political will constitute political corruption—a fact, like it or not.

The finance minister admitted that the new PCBs were approved on political considerations – and if that’s not asinine enough – another politician on TV argued that since BNP was rejected by the people why they should be given bank licenses.

Did the people vote for Awami League to distribute bank licenses on election-outcome basis? Since these licenses were issued on political considerations the proposed directors and the partners of these new banks must have met the following 12 set of criteria:

  • Do any of the partners have criminal records and convictions?
  • ) Do any of the partners have had loan default record?
  •  Have any of the partners ever been associated with stock market scams?
  •  Are any of the partners actively doing politics and contribute money to the ruling party coffers?
  •  Do any of the partners have black money to deposit towards initial capital requirement?
  •  Are any of the partners related to the country’s top politicians?
  •  Do most or all of the partners lack the expertise and experience of the business of banking?
  •  Is there a possibility that the bank owner may follow the track of the closed Orion bank owner’s footsteps –one who left the country allegedly with depositor’s money?
  •  Is there a possibility that some partners are paying –in part or full –director’s share of the capital requirement as quid-pro-quos?
  •  Do the owners plan to fill most positions in the new bank by stealing experienced people from other banks currently in operations?
  •  Is it likely that the director of the bank may liquidate his shares -although nothing wrong in it –after a certain period to some other investors for profit?
  • Should anticorruption commission investigate the sources of Tk400 crores to be deposited as initial capital requirements for a new bank?

 

Having all the responses matching with those foretold in intelligence report and putting myself in the shoes of PCB licensing authority, I approved the application by the power vested in me.

Please know that — even though I found the applicants qualifications contrary to the benefit of the banking and financial sector in particular and the larger interest of the country in general, I have to grant the certifications under political pressure because I love my position and power. I don’t want to relinquish my job under any circumstances —and of course, I don’t want to be forced out either.

The fons et origo of the story is that BB on 7 April approved six new PCBs — mostly sponsored by political bigwigs. Earlier three new PCB licenses were given to non-resident Bangladeshis with Awami League leaning political pedigree. The six new PCBs were picked from a list of 37 applications based on political consideration as admitted by the Finance Minister.

Despite initial resistance against approving licenses for new banks, BB finally cooked up some rationales to persuade its board members to succumb to the deal. Rationales are as weak as they could be: No new licenses were given since 2001 to 2011 notwithstanding the realizations of many significant developments in the economy such as 56 percent increase in GDP along with higher imports, exports and remittances. The past decade also saw the PCBs becoming increasingly more competitive –and yet a big chunk of the people remained under-banked.

The argument that more banks will proliferate service to more people is outmoded and debatable. This can easily be achieved by branching out of existing banks at a much lower overhead cost. In fact, more banks mean higher average cost for each accruing from large overhead costs — such as structures, equipment, salaries, and benefits of executives and employees. That is precisely the reason why banks in the US and other western countries are consolidating to reduce average cost, achieve efficiency and become profitable.

Experienced and skilled people cannot be produced overnight to successfully run commercial banks; they’ll have to be lured away from existing banks — threatening inefficiency and suboptimal service – and may even portend their operational existence. Thus, instead of increased competition with more banks, there’s the likelihood of lessening competition and raising the spectre of higher lending rates — hurting the country’s investment goals and future growth prospects.

 

Contestable market theory postulates that you only need a few firms in the industry to operate competitively. When existing firms with some market power operate profitably, new entrants are attracted into the industry. If entry is regulatory friendly —and not cost prohibitive, then the existence of a very few or even only one firm may not result in economic inefficiency as in monopoly. The threat of potential entry may be enough to keep the single firm or few firms in the industry operating at or close to the competitive price and output.

In contrast, there’re times when great numbers of firms are able to organize and act as a unified seller characterized by collusive behavior. Firms may have the incentive to act in this way to increase profits by raising price and restricting output — operating like a monopoly.

Banks are the life lines of an economy. They mustn’t be politicized. Banking industry is the most highly regulated sector in any country for the following reasons:

  • Protect the safety of the public’s savings;
  • Control the supply of money and credit in order to achieve a nation’s broad economic goals (high employment and low inflation);
  • Ensure equal opportunity and fairness in the public’s access to credit and other vital financial services;
  • Promote public confidence in the financial systems, so that savings flow smoothly into productive investment and payments for goods and services are made speedily and efficiently;
  • Provide the government with credit, tax revenues, and other services;
  • Help various sectors of the economy that have special credit needs such as housing, small business, and agriculture etc.;
  • Protect the public from syndicate or collusive behavior in deciding interest rates on various products;
  • Restrict unfair competition, predatory behavior, and thus reduce bankruptcy rate.

It is likely that the new “politicians- owned banks” may exert extra burden on the country’s financial sector by making politically favored risky lending and use force and favor to persuade high credit rating borrowers to do business with their banks and in the process resort to predatory lending and all other anti-competition mischief to bring some PCBs down. What would that do to the millions who invested in the shares of these banks?

With the stock market being in a topsy-turvy state since the 2011 scam, any debacle in the banking sector will manifest the specter of a financial doomsday in the country. There’s no guarantee that BB – which couldn’t resist political pressure for issuing new bank licenses – would hold its ground to protect the banking sector from the same politicians – believe it or not.

The writer, formerly a Physicist and Nuclear Engineer, is a Professor of Economics at Eastern Michigan University, USA.

 

Source: The Daily Sun

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