Curing the ills of banking sector

Bangladesh is a third world country with an under-developed banking system, particularly in terms of the services and customer care provided by the state-run banks. The private banks that emerged following the 1990 Financial Sector Reforms Programme (FSRP) are trying to imitate the banking structure of more developed countries, but this attempt is often foiled by inexpert or politically-motivated government policies executed by the Bangladesh Bank. The outcome is a banking system fostering corruption and illegal monetary activities, money laundering etc. by some politically-powerful people and criminals. At the same time it is making the attainment of international standard in services or performance difficult leaving the common people and students studying abroad or resorting to distance learning etc at the receiving end.
There is no denying the fact that the banking or financial system plays a significant role in the economic development of a country. In fact, it is the system by which a country's most profitable and efficient development projects are systematically and continuously directed to the most productive sources of future growth in an economy. The financial system should not only transfer funds from savers to investors; it must also be able to select projects which will yield the highest returns, accumulate sufficient quantities of capital to fund the range of investment projects across economic activities, account for price risks across assets, monitor performance and enforce contracts. The larger the financial sector is in the context of the overall economy, the greater the share of lending by a depository is, and the greater the credit flow to the private sector is rather than the public sector and the greater the country's economic growth is.
The banking sector in Bangladesh made a remarkable progress in respect of automation of its functioning in last several years. For the pro-active and forward-looking approach of the Bangladesh Bank, a number of automation initiatives have been implemented in the banking sector. There has been a rapid progress in use of information technology (IT) with the increased adoption of internet as a delivery channel contributing to a gradual reduction in overhead costs of banks in the areas of marketing, IT and staff by providing significantly high-quality services through ATM (Automated Teller Machine), POS (Point of Sale), Online, Internet, Tele-banking, SWIFT (Society for Worldwide Interbank Financial Telecommunication) etc. These have significantly changed the market structure of Bangladesh's banking system. Moreover, the banking system has undergone unprecedented changes over the last twenty years since 1990. The country moved away from state control to a relatively market-based open economy by adopting a major stabilisation, liberalisation and deregulation programme under the influence of the World Bank and the IMF (International Monetary Fund) against the backdrop of serious macroeconomic imbalances in early 1980s. After the initiation of FSRP in 1990 the sector was exposed to a greater competition with the entry of new private banks and more liberal entry of foreign banks in line with the recommendations in this FSRP. These have significantly changed the market structure of the banking system. Consequently in the recent years the state-owned banks have lost a big share of the market to the private commercial banks. These changes will have major and vast implications for concentration and competition in the banking and financial sectors in Bangladesh. However, such increased concentration can solidify the market strength of large banks by fostering collusive behaviour among them and therefore hinder both competition and efficiency and even give rise to the growth of corrupt practices.
It is reported that the state-owned banks will get a bailout capital of Tk 50 billion from the state coffer. It is clear that insufficiency of capital in the state-owned banks is the results of large-scale debt defaults and deceits by the borrowers. This money will surely come from the taxpayers' revenue. Though such a bailout is necessary even today, there is yet no measure or guarantee in sight which may address the reasons that cause the erosion of capital of state-owned banks necessitating such rescue measures. Since the amounts of bad debts have been high enough, the state-owned banks' own capital has come under pressure resulting in such a crisis.
If forgeries like those of Hall-Mark and Bismillah Group are not checked, the state will have to go on bailing out state-owned banks repeatedly year after year in future. If the looters are not brought to book and if they are allowed to stay at large, such incidents will continue unabatedly. As a result, the disparity will increase and the depositors being deprived of fair profit will lose interest in savings. If so happens, the investments will fall slowing down the pace of economic growth, development and employment generation, for the purpose of which the banking system has been established.
Bangladesh's experiences are that the state-owned institutions like the Railway, Bangladesh Road Transport Corporation, Trading Corporation of Bangladesh, Bangladesh Inland Water Transport Corporation, public sector medical services and educational institutions fail while their counterparts in the private sector thrive. Many, perhaps not illogically, smell a whiff of conspiracy that the private competitors in such sectors might have been behind the acts of sabotage to establish their monopoly at the expense of the public sector and the benefits the people could reap from the state-run institutions. Many of the members of the ruling class are involved with such private utility services. The industrial organisations in the public sector are perhaps no exception. So it is not surprising to note that the state-owned banks will fail and make the way for the private ones to thrive. This neither does happen nor is desired in mixed economies as in India, Britain, China or anywhere in the world. But surprisingly Bangladesh is an exception. Appropriate and effective government care is needed to found the state-owned banking industry on a sound footing and thus help it survive.           
The writer is a retired                              professor of economics.                           [email protected]