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In quest of a gutsy central bank

Salehuddin Ahmed | November 10, 2020 12:00:00

Pragmatic and relevant policies of Bangladesh Bank are very important for regulating the financial sector

Regulatory regime of financial sector of any country is important for effective and smooth functioning of all financial institutions. In the wake of global as well as domestic financial challenges an independent and strong central bank is essential. Central bank autonomy is a debatable but crucial issue. However, to achieve the objectives of the bank such as inflation control, economic stability, better financial management etc., it is necessary for the central bank to be free from all external influences. Thus, the bank should be fully autonomous in all its functional and decisional activities.

Some attributes of interdependence are whether the central bank can refuse credit to the government; whether it can meet its expenses without depending on the government; whether its governor or board of directors can function independently; whether its governor is independent in following monetary policy; whether it is free to choose its monetary instruments; and finally, whether it is free to regulate the banking policy and the banks.

The main responsibilities of the Bangladesh Bank are monetary policy functions, to be a bankers' bank, a banker of the government and regulators as well as supervisor of the commercial banks. The functions of the Bangladesh Bank are quite large in number and wide in coverage like many central banks in the developing countries. However, in many countries, especially in some developed countries its functions are limited to monetary operations. For example, the Bank of England (BoE) deals with monetary policy functions and other functions is regulated by Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA), two independent bodies under the overall guidance of BoE. Most of the central banks have dual functions like those of the Bangladesh Bank. Therefore, its tasks are enormous. The performance of the economy and that of the different sectors are closely linked with the performance of the Bangladesh Bank BB). The vision and mission given below states the functions of the Bangladesh Bank.

• Currency and payment management policy;

• Management of the foreign exchange scheme and controlling the foreign exchange market;

• Managing foreign exchange reserves and foreign exchange regulation;

• Regulating and overseeing banks as well as financial institutions and advising the government on the interaction and effects of fiscal, money and other economic policies.

Implementing the vision and mission of the Bangladesh Bank has faced serious challenges and limitations. In the context of Bangladesh Bank, the debates on macro-economic issues centered around how Bangladesh Bank can set up monetary targets without political pressure and how far monetary policy can be implemented without any political and structural limitations. The authority of the BB over the constituent banks and financial institutions recently shows some limitations in controlling corruption, increasing non-performing loans, lack of good governance, weak management and finally erosion of public faith in the banks. It seems that the BB due to both "internal" (within the bank itself) and "external" (outside the purview of the bank) hurdles, finds it difficult to exert effective control over the banking sector. The pressure groups of stakeholders namely Bangladesh Association of Bankers (BAB) - an association of bank owners and, the Association of Bankers, Bangladesh (ABB) - an association of CEOs/ MDs of banks, play vital roles in the regulatory aspects of the banking sector.

To have an independent and effective Bangladesh Bank, the necessary aspects are:

(a) more focus on core banking issues by the central bank,

(b) appropriate and strong prudential and management norms of the central bank that are not subject to frequent changes due to external political/administrative pressure and,

(c) a system of prompt corrective actions for management of crises and for legal/administrative actions against persons responsible for crises in a particular bank or in the banking 'system' as a whole.

In real-world situations, extraordinary independence and full autonomy to the central bank may not be easily achieved. Therefore, central bank like Bangladesh Bank can minimize political and other external pressure by constantly engaging with them and gaining public support for actions that may make it (BB) autonomous and effective. Whether in good or bad times, supervisors always face pressure from lobbyists and from politicians that can undermine the stability of the financial system.

For the BB to be successful in regulating the financial sector, it must have very relevant and pragmatic "policies", prudential management rules. It should also ensure that these are fully followed by all banks and financial institutions. "Discretionary" powers or "ad-hoc measure" must be avoided to safeguard the independence and autonomy of the country's central bank.

The typical case of "policy" versus "discretion" must be resolved with the BB taking a strong stance. Policies and rules, not the discretionary powers of any individual and agency should prevail. Time has come for the BB to strike a balance, showing an appropriate professional stance while avoiding the danger of politically motivated reforms in a highly technical domain.

The notable resilience of the Bangladesh economy as exhibited by key macroeconomic indicators so far lends strong support to the outlook that Bangladesh may be able to recover from Covid-19 pandemic and above all, a strong and independent role of the BB is essential. However, the resilience of the economy, with stability and development with equity, will have adverse consequences if the major challenges in the financial sector are not met properly.

To meet the challenges, one of the most important tasks, is to make the financial sector (banks, non-banks, insurance, capital market, microfinance market) more competitive and service-oriented catering to the needs of all types of clients across all the areas of Bangladesh. Along with this, the challenges of the external sectors (exports, imports of goods and financial services) are also to be met by the financial sector.

The country needs to enforce strict adherence to regulatory and prudential guidelines that are effectively integrated among all institutions in the monetary sector and the financial sector. The global financial crises of 2007 and the present state of somewhat low global growth outlook due to the impact of Covid-19 point to the fact that there is no substitute for monetary policies with prudent and careful regulations even when market-based, liberalised structures operate. At the same time the central bank should not resort to overregulation of the financial sector because that may stifle smooth functioning of economic activities.

The policy stances towards the financial sector of Bangladesh resulted from action on two fronts: on the one side, the stakeholders mainly the business people, clients of banks and other users (internal and external) articulated the need and the kind of changes required in the sector; on the other side namely the policymakers (which includes politicians and advisers to the government) on their own and as a response to the stakeholders' demands, initiated the process of reforms and changes. Therefore, in different phases, changes took place to take the country forward. However, the challenge of backing the tasks to be taken by "political will" remains and the actions to be taken should be based on facts/data and knowledge of the decision makers, experts and implementers.

The financial sector policies and activities directly impact productive activities covering both income and employment as well as income and asset distribution. The indirect impacts of financial sector operate through its effects on the fiscal and monetary policy stances. In this context, the macro policy stances and the financial sector are critical to accelerated and sustainable development of Bangladesh. The role of the central bank, therefore, is a key factor in our journey to accelerated growth and overall development.

Dr. Salehuddin Ahmed is Former Governor, Bangladesh Bank, and Professor, BRAC University. [email protected]

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