Refinancing by BB responsible for surplus cash in banks

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FE Report
A top aide to the Prime Minister Saturday said lax reserve requirements for the Islamic banking and the central bank's refinancing programmes are largely responsible for surplus cash in the banking system.
The Bangladesh Bank has slashed statuary liquidity rate (SLR) for Islamic banks operating in Bangladesh to 10 per cent, while the same is 18 per cent for other banks.
Dr Mashiur Rahman, finance adviser to the Prime Minister, said it has remained unclear why the Bangladesh Bank is further injecting money into the banking sector through its refinancing facility, despite the fact the country's banking sector is saddled with almost US$ 4.0 billion in excess liquidity.
"The cause of excess liquidity in the banking system needs to be investigated," Dr Rahman said.
"The central bank is buying dollars on the one hand and refinancing banks on the other. The whole process remains unclear," he added.
As of April 2009, excess liquidity stood at Tk 277 billion, up from Tk 129 billion in June last year, according to data available from the central bank.
The Bangladesh Bank said it can extract as much as Tk 24 billion from the banking system by increasing the SLR by 0.5 per cent.
Economists warn that surplus cash in the banking system poses threat to the economy as it may lead to politically-directed lending.
Dr Rahman said banks following the Shariah law can take interest and invest that income in welfare programmes for the poor.
"The Islamic Development Bank keeps deposits in the western banks. And its interest income is spent on waqf and other welfare programmes across the world," he told a discussion meeting in the city, organised by the Economic Reporters' Forum (ERF).
The head of private research group D.Net, Ananya Raihan, warned that excess liquidity could lead to unscrupulous lending which might further deteriorate through political lending.
"Such a sluggish growth in credit market is creating pressure on the country's scheduled banks' health," Mr Raihan said.
While banks are paying interest on deposits, they fail to earn from lending, he said.
The finance adviser said Bangladesh escaped the first round of shocks from the global recession as its economy was not closely linked to the global economy.
But he warned that the economy would be hurt if the recession deepened and was prolonged.
To offset the impact of global crisis, Dr Rahman noted, his government's main strategy is to stimulate domestic demand and create jobs.
But the government also announced stimulus package for the export sectors so that exporters did not lose markets abroad.
The adviser said subsidies to the apparel sector would benefit importing nations.
He, however, noted that the government would consider support for readymade garment exporters, given the higher production cost and price pressure.
The finance adviser said a bold and prudent step is needed to develop the country's coal mines including the controversial Phulbari project to boost power generation.
Bank loans with zero per cent interest rates would not help Bangladesh attract private investments unless it boosted power generation, he added.
President of Foreign Investors' Chamber of Commerce and Industry Waliur Rahman Bhuiyan said domestic impediments, like energy and electricity shortage, are responsible for lower private investments in Bangladesh.
The FICCI chief said Bangladesh should not expect much from foreign investors as they are "very cautious" about investments, hurt by the global crisis.
Mr Bhuiyan said the government should not invest much, rather it should help and encourage private investors to invest massively. "State firms have played a big role in draining the economy."
Chairman of Multimode Group Abdul Awal Mintoo, Managing Director of NCC Bank Ltd Nurul Amin and President of Bangladesh Economic Association Kazi Kholiquzzam Ahmed, among others, addressed the discussion meeting on the state of the economy.
ERF President Nazmul Ahsan and General Secretary Sajjad Alam Khan also spoke at the meeting.