Lessons from three black chapters of the banking sector

The next black chapter took place on 26 August 1999 and it was UCBL again. A meeting of the bank’s board of directors was held on that day. The headline of the next day’s daily Ittefaq was “Akhtaruzzaman Babu takes over UCBL’s board of directors at gunpoint.” Zafar Ahmed Chowdhury was chairman of the bank. He was involved in the politics of Awami League, while Akhtaruzzaman Chowdhury Babu was the industry and commerce affairs secretary of Awami League.

According to the report, published in Ittefaq, Akhtaruzzaman Babu and his son along with 50-60 armed cadres stormed into the bank’s headquarters where a meeting of the board was underway. The directors were abused verbally, assaulted and forced to sign their resignations. The armed cadres beat up Zafar Ahmed Chowdhury mercilessly and stripped him naked as well as beat two other directors. Police were present at the scene but did nothing. Bangladesh Bank then dissolved the entire board. Later Zafar Ahmed Chowdhury was reinstated following a court order. Akhtaruzzaman returned to the bank’s board of directors in 2010 after Awami League came to power again.

The next day, the ousted directors of UCBL met the finance minister Shah AMS Kibria on 27 August 1999. The minister commented “The incident of UBCL has two angles. One is economic and Bangladesh Bank is looking into it. Another is political, which the prime minister will see to.”

The former finance minister had spoken the truth. Banks have an economic aspect in the country as much as political aspects. Another finance minister of Awami League also said later that giving approval for new banks was a political decision. For example, a bank will have a board of directors and that’s an economic issue, but five members of a family will be on the board for nine years and that is a political decision. On the other hand, when loans turn default, the bank will recover these and that’s an economic issue. But giving the defaulters opportunity to get loans again is, of course, a political decision.

Let’s talk about another political incident during the tenure of Bangladesh Bank governor Atiur Rahman. The late deputy governor of Bangladesh Bank Khondkar Ibrahim Khaled spoke about it. At that time, five members of the first generation private National Bank’s board of directors were from the same family. Late Zainul Abedin Sikder was the chairman of the bank and the remaining four directors were members of the Sikder family. Yet it was against the Bank Company Act in 2014 for more than two members of a family to be on the same board of a bank. Bangladesh Bank sent a letter to the bank and served with a show-cause notice for violating the Bank Company Act.

National Bank didn’t bother to reply to the letter sent by Bangladesh Bank at that time. Rather, they lobbied at a high level with the letter and the next series of events was very interesting. At one point, the government itself changed the act allowing the induction of four members of a family at a bank’s board of directors at a time. For this reason, the amendment of the Bank Company Act was passed at the parliament on 17 January 2018. The act incorporates a provision stating that a person can hold the post of a bank director for nine straight years, which previously was six years. This established family dominance in a bank and that was a political decision.

The bank reform committee led by Wahiduddin Mahmud commented, “It’s clear that a significant number of directors has used the banks owned by themselves as the source of finance, ignoring the interest of the depositors.”

After that, the central bank enacted rules and regulations on directors taking loans from their own bank. The circular issued on 5 August 1999 said loans taken by a director or his/her relatives cannot be more than 50 per cent of the paid-up capital of the shares owned by the respective directors. After that, the biggest problem of the banking sector was supposed to be solved, but, in fact, it wasn’t. But one thing really worked out. Internal relationship among directors of various banks had developed dramatically because they had to take loans from other banks. More loans were taken under other people’s names than the loans taken by themselves. Since then, bank directors have developed a system of transactions among each other and that circular of Bangladesh Bank had a great role to build the “friendship” among the bank directors.

After that, problems arose in private banks when relations among themselves were disrupted for any reason. Like, the sons of Sikder opened fire at the managing director of Exim Bank. The amount of loans taken by directors from both banks is huge. Even loans have been taken under other people’s name. But what actually transpired is difficult to say. Perhaps, the project was too unreal and Exim Bank didn’t want to take the risk. Consequently, the managing director of Exim Bank was held at gunpoint and shot at. There is no doubt this incident will remain as another black chapter in the banking sector.

A review of the performance of private banks for 39 years shows that banks perform better if run from the economic angle, where the operations are left to the chief executive officers and the managers and the activities of the board of directors are limited to creating an environment and formulating policies. Following this policy, banks that once were in a bad shape have now turned into better ones. The much-talked-about UCBL or City Bank and Pubali Bank are examples. On the other hand, National Bank and several other banks that performed better before have turned into bad ones.

Approval of new banks, extra perks to loan defaulters, rules allowing four directors from a family – the government has done everything to give special privileges to a group of bank owners. And the owners have given many know and unknown things including their loyalty in return. If this relationship of ‘transactions’ among each other remains in place, more black chapters are bound to emerge in the banking sector.

The finance minister promised in the budget that a bank commission will be formed to stop mismanagement in the banking sector. But the formation of the commission is unlikely because of pressure from the bank owners. Amid this, Bangladesh Bank has taken a stern stance against National Bank. Thanks goes to Bangladesh Nank. If Bangladesh Bank can take a strong position against all others, then it may work. A bank is not a place for politics. It is a financial institution.

Shawkat Hossain is a special news editor at Prothom Alo. He can be reached at [email protected].

*This article appeared in the print and online editions of Prothom Alo and has been rewritten in English by Hasanul Banna