Why do so many people want to open banks in Bangladesh?

More and more businessmen are showing keen interest to open new commercial banks in Bangladesh, even though the country’s banking sector is under stress because of financial problems like non-performing loans (NPLs).

As of September 30, the 57 commercial banks in the country have disbursed total loans of Tk752,730 crores. Of them, the NPLs stood at Tk80,307 crores or 10.67% of the total loan amount, according to latest Bangladesh Bank (BB) data.

The banks had written off Tk45,000 crores. With this, the total default loans will be Tk125,307 crores, the BB said.

Bankers said irrecoverable loans would bring down the banks’ profits and they would not be able to pay dividends to their shareholders.

Moreover, bad debt leads to provision shortfall and capital deficit and also impacts the deposit and lending interest rates.

Despite the challenges, BB sources said they had received more than 80 applications seeking permission to open private commercial banks at a time when majority of the banks were struggling to survive.

Two of the applications would be approved, they said.

The sources claimed that the Finance Ministry had forced the central bank to issue the two licences after BB rejected the proposals citing current condition of the banking sector.

Economists, bankers and experts told the Dhaka Tribune that there were a number of reasons behind the entrepreneurs’ interest in opening banks in Bangladesh.

“Businessmen are usually interested in owning banks to ease access to money and ensure the flow of fund for their other businesses,” Md Yasin Ali, a supernumerary professor of Bangladesh Institute of Bank Management (BIBM), told the Dhaka Tribune.

“But the rising NPLs raises the question whether the businessmen want to own banks to loot public money?”

The chairman of a private bank, who declined to be named, explained that owning a bank had perks like elevated social status. Bank owners also get dividends and other allowances.

“A bank can make profits, if it operates in the proper way,” the banker said, without elaborating.

“Most of the banks hide the real amount of NPLs and show profits at the end of the year to give dividends to shareholders,” the banker said. “It is a way to loot the depositors’ money and is characteristic of this business in Bangladesh.”

The Bank Company Act 1991 (Amended in 2013) stipulates that a director cannot take loans worth more than 50% of his stake in the bank.

Bankers alleged that some directors sidestep the rule by taking loans from other banks through mutual understanding.

They said a bank needs to have a paid-up capital of Tk400 crores. Once in operation, the banks get control of thousands of crores of taka belonging to depositors and shareholders. Bank owners, manipulating the existing regulatory system, get access to the bank money and deal with it without any risk of their personal losses.

“Lack of exit policy for banks in Bangladesh allow businessmen to misuse public money by opening banks,” BIBM Director General Toufic Ahmad Choudhury told the Dhaka Tribune.

Only in our country the Board of Directors interferes with the management board, and surprisingly, they do it for disbursing bad loans, appointing employees and some other illicit-money-related issues

“The owner of the banks are not actually the directors, basically the depositors own the banks. If we calculate the ratio, we would find that the capital of the bank is 10% of total risk weighted asset, while it would be hardly 3-4% of the total liability. So, if someone contributing 3-4% fund, could control over on 100%, it will be definitely discriminatory.”

According to the law, the Board of Directors (BoDs) of a bank should be comprised of competent and skilled persons with a view to formulating policy-guidelines and supervising business activities of the bank efficiently as well as ensuring good governance in the bank management.

“The responsibilities of the board of directors of a bank-company are more important than those of other companies; because in case of a bank-company it is essential to earn and maintain confidence of the depositors as its business is mainly run with the depositors’ money,” read the law.

BIBM DG Toufic said most directors of Bangladeshi banks did not even know about this, let alone follow them.

“Only in our country the Board of Directors interferes with the management board, and surprisingly, they do it for disbursing bad loans, appointing employees and some other illicit-money-related issues,” he said. “This is unimaginable in foreign countries.”

Bankers said managing directors of some banks had recently been forced to step down after they declined to disburse loans according to the bank owners’ will.

They pointed to resignations of three MDs from National Bank within a year. The bank has been functioning without a managing director for more than nine months. Managing director of Meghna Bank has also allegedly been forced to resign.

Speaking on the issue, former BB deputy governor Khondkar Ibrahim Khaled said the banking sector was in danger because of undue influence exerted by bank owners.

“Political and financial miscreants have taken control of the banks’ ownership,” he told the Dhaka Tribune. “It is easy for them to bring a bank under their control as they have money.”

Khaled continued: “The new bank licence seekers might be interested in owning banks since it is easy to bag money from the banking system through corruption and financial crime.

“Otherwise, considering the banking sector’s current status, none would want to come in with honest intentions.”

Former central bank governor Salehuddin Ahmed blamed the lack of proper financial laws and regulations for the sector.

“The financial management of Bangladeshi banking sector is very weak,” he told the Dhaka Tribune. “Unscrupulous businessmen are lured by this weakness. They become interested in owning banks and looting public money.”

To prevent the practice, he suggested formulating separate laws for financial crimes and well as a proper banking sector management guideline, including banking resolution policy known as “exit policy.”

The central bank, however, has taken a number of measures to maintain normalcy in the financial sector.

These measures include fixing business goals, scrutiny of all records of board meetings, approval of big loans and loan limit of a single client.

Despite these steps, the central bank has been unable to control the sector.

Meanwhile, in a rather unusual development, a single business group has taken control of eight banks.

Amid this, the Parliamentary Standing Committee on Finance Ministry on Tuesday recommended passing the Bank Companies (Amendment) Act 2017, which will encourage more business groups to venture into the private banking sector.

The law recommends increasing the tenure of private banks’ board of directors to nine years from six years, and allowing four members of a family to sit on a board instead of two.

“If the new law is enacted, then bankers will not be able to work properly at all,” former BB deputy governor Khaled told the Dhaka Tribune.

Source: Dhaka Tribune.