How banks could facilitate everyone

When Rubel (pseudonym), a small supplier in Gazipur, went to a commercial bank last month to ask for a small loan, the credit officer shook his head. ''We aren't approving any new loan proposal until the bank manages its bad loans,'' the officer said. Rubel is not alone in this. Bangladesh's banking sector, in recent months, has sent the same message to thousands of entrepreneurs throughout the country. In a country where 85 per cent of business financing flows through banking channels, this message has far more serious consequences beyond Rubel's distress. The cost of this grim reality is already visible through shuttered factories, the agony of unpaid workers and the confusion of jittery depositors.
In the country's banking sector, straight forwardness and honesty were systematically discouraged and ignored, while compliance with power rather than prudence was rewarded. Weak governance, coupled with political interference, eventually bends the system and drastically reduces naturally expected outcomes from the economy. Ignoring the social and economic parameters, the previous government focused on inflated accounting figures and remained self-content until they couldn't anymore. That's the danger of it - the more you hide, the worse it becomes. Especially for banks, this is the grim reality.
Skyrocketing non-performing loans (NPLs) have left the banks with strained balance sheets and very limited room for lending, especially to new entrepreneurs. The central bank, however, shows greater courage in making decisions on a scale never seen before. Several private Islamic banks faced an acute liquidity crisis due to poor governance and inadequate monitoring, prompting Bangladesh Bank to step in and consolidate them into a single entity, the Sammilito Islami Bank. However, with a very optimistic outlook, some analysts say that even if everything runs smoothly and a 15 per cent compound annual growth rate (CAGR) is ensured, it will take at least 40 years for the entity to reach break-even, given its colossal bad loans and enormous liabilities. I asked AI for the worst-case scenario, providing all the data I had on the five merged banks. The responses from different AI tools were largely the same. It could take 645 years or more to cover the shortfall.
Apparently, a merger is not a magic wand; it only gathers problems into one container. It is more of a symptom than a cure for the systemic organ failure the economy is facing today. Sammilito Islami Bank will warrant deeper institutional and policy-level reform along with cautious monitoring. Even after that, regaining people's trust will remain challenging for a long time. Then there comes the real question - is it possible to break or at least weaken the chain of corruption, nepotism, and the practice of compromised ethics in the sector?
The Basel framework and other regulatory guidelines have been ignored for years. Minimum capital and liquidity requirements, exposure limit, and mandatory information disclosure have been disregarded. As time elapses, these malpractices and conditions have created a black hole of obvious catastrophe. Although they are the only type of institution that can benefit both borrowers and lenders while still making a profit, they thrive in the market. The beautiful financial alchemy of the banks can surely improve society, uplift overall growth, and ensure sustainability.
The core essence of this alchemy is distributing risk in many baskets rather than concentrating it in one or a few. Small loans can create a large portfolio for banks and reduce risk. However, most of our banks tend to lend money to large corporate parties, as it requires fewer human resources and reduces costs in many other ways. Collecting deposits from millions of ordinary people immediately creates huge liability. Lending the hard-earned income of people to a single or a few parties is simply gambling with people's trust. It's true that large loan disbursement is required for economic development. However, small and medium lending can't be overlooked, as it helps small and medium enterprises flourish and distribute risks among many. It ensures the flow of funds in various sectors, safe and sustainable investment, and regulatory safeguards. In this way, the bank becomes a collective shield where everyone contributes, and everyone benefits. No single entity/person carries the full burden of uncertainty.
In Bangladesh, the aforesaid possibilities fade away amid political affiliation, insider lending, corruption, and nepotism. In banks, boards often represent the sponsor's interests rather than those of depositors. The recent collapse in the banking sector indicates three major flaws, including bad loans, weak oversight, and incentives that encourage risk without consequences, or in simple terms, moral hazard.
However, a ray of hope is emerging on the horizon as the Bangladesh Bank is adopting bold measures and policy-level decisions to rebuild trust and create a banking sector that fosters the nation's growth and prosperity. Before that happens, several non-negotiable things need to be addressed. The central bank should be truly independent. All banks must undergo internationally verifiable audits, and the reports must be published in a timely manner. Depositor's protection should be further strengthened by timely laws and robust policies. SME financing should be expanded, and all banks must comply with regulatory requirements on capital adequacy, liquidity, and sector-wise loan disbursement.
The reform will be difficult, as there will be resistance from the groups that benefit from the current chaos. There will also be legal and policy-level challenges, along with the uncomfortable truth disclosure. However, the slow and painful erosion of credibility in the sector will be far worse. The reform has been started, and it must be continued. Once we get it right, the banks will facilitate everyone - the borrower, the lender, the entrepreneur, the farmer, the dreamer, and, of course, the banking sector itself.

The writer is Management Trainee Officer, Mercantile Bank PLC.
mukshadur.gib.info@gmail.com