Modernisation of banking: Global and Bangladesh perspectives

Modernisation is evolutionary and inevitable. It got further momentum with the advent of fast-track technology developments around the world. We now live in a digital age. This has led to dramatic changes in the global economy, especially in financial innovations and banking business, coping with widespread array of consumer behaviours and diversified business needs. But it is highly necessary to examine the relevance of modernisation agenda of banking since it is not just about the way we do business; it is also about the business we do. Most importantly, every modernisation agenda for financial and banking system has direct and indirect ramifications on our national development and economy. We need to carefully identify the scopes and areas of modernisation, both from global and national perspectives.
Is technology investment an indicator or all about banking modernisation? This writer's  answer is 'No' although there are prevailing perceptions that investment in technology would modernise the banking business. There is no denying the fact that technology is the blessing of this century and definitely, it is one of the much-needed facilitators for modernising the way we do banking business. But unless other important areas are brought into the scope of modernisation, even the state-of-the-art technology wouldn't strike any improvements in banking; rather it would burden the bottom line.
The recent empirical evidence is the global economic recession of 2009. Most sophisticated technology-driven financial and banking industries in the USA and Europe were about to be collapsed due to extreme liquidity crisis and drastically shrinking credit growth.
So, what does this recent economic recession tell us? This indeed makes it clear that we will have to redefine the scopes of modernisation taking a 360-degree overview of industry-specific, national and global needs. This will drive the sustainable development agenda that would ultimately modernise the financial and banking business.
So, why do banks exist? Economists have been asking the question 'what's different about banks' for ages. In his famous article, Corrigan (1982) argued that banks are special because:
n They provide transaction services and administer the nation's payments system;
n They provide backup liquidity to the economy; and
n They are transmitters of national monetary policy.
Based on these arguments, the fundamental role of banks is to facilitate and process transactions, take deposits, make loans, and generally support the efficient functioning of the economic system. Any modernisation strategies must give due attention to these fundamentals.
One can go deeper into the speciality of banks and ask a more fundamental question: why do banks make loans and provide deposit services? For decades, banking researchers have studied the question of why banks exist and have made considerable progress in developing banking theories to explain banks' central role in the economy. Although many of us may take existence of banks for granted, in a 'perfect' world, where 'savers' can channel their surplus funds to 'borrowers' without friction, financial intermediaries like banks are not needed. As a corollary, banks' existence must be motivated by certain economic frictions so that these, as financial intermediaries, can provide some 'value- added services' from transferring funds from 'savers' to 'borrowers' and providing liquidity.
Also, delegating the loan-monitoring function to banks avoids redundancy of monitoring by numerous individual depositors. Banks are credible monitors because their returns are more predictable due to diversification effect of making a large number of loans. With credibility, banks can gather deposits at relatively lower cost.
Keeping these basics of banking in mind, we wilI now highlight modernisation agenda of banking from national and global perspectives.
GLOBAL PERSPECTIVE: Let us first present some of the main highlights of the World Bank as to how it perceives modernisation which the IMF published in a Development Report on April 11, 2012:
n At the World Bank, modernisation is about strengthening of focus on results, openness, and accountability,
n To become more result-focused, first priority has been to expand capacity to measure, report on, and learn from results,
n Focusing on results and openness is strengthening of the bank's efforts to make itself more accountable to shareholders and other stakeholders through a new Corporate Scorecard,
n External accountability ultimately relies on internal accountability, an area of intense focus of the modernisation agenda,
n To implement this agenda of results, openness, and accountability, a bank is reforming human resources and information and technology management, and
n Modernising the bank is a large and challenging agenda encompassing work on processes, instruments, policies, and cultural change.
The crux of the World Bank's modernisation agenda is 'Accountability' in the way it operates while focusing on technology to execute this prime modernisation agenda.
According to the Banking Banana Skins 2014, a PwC sponsored global survey conducted by Centre for the Study of Financial Innovation (CSFI) among 650 bankers, regulators and close observers of banking in 59 countries, the top 10 concerned areas/risks are:
n Regulation,
n Political interference,
n Macro-economic environment,
n Technology,
n Profitability,
n Pricing,
n Credit,
n Corporate governance,
n Criminality and
n Capital availability
This list further brings to the fore the challenges of banking for which national and global level drives are to be initiated as part of modernising the banking business.
In addition to the areas mentioned so far, there are commonly talked-about agenda that have been identified to be pivotal for setting the pace of modernisation in banking business across various parts of the world. Some of these are:
n Liquidity management,
n Focus on emerging markets,
n Infrastructure development,
n Internal control and compliance,
n Quality of risk management,
n Merger and acquisition,
n Customer centricity,
n Product innovation, and
n Delivery channels
Now let us put focus on priority areas for modernising the banking business in general.    
BANGLADESH PERSPECTIVE: The economy of Bangladesh has been in transition from agro-based one to industrialisation. But unfortunately, the process of full transition/transformation is still in the tunnel due to persistent political destabilisation, lack of state sponsorship and possibly appropriate leadership, inadequacy in funding, unskilled human resources, poor infrastructure development etc. As a result, our country has been witnessing nearly a hybrid economic model having majority contributions from the industrial proceeds, mostly driven by the private sector. However, in recent times, Bangladesh has experienced a dramatic expansion in small and medium industries, particularly ready-made garments (RMG) and textile sector which have boosted the country's economy greatly. In fact, RMG has emerged as the country's largest foreign exchange-earning sector. Although garments have been keeping the blood-line of the national economy agile to an extent, this single stream is not sufficient in securing sustainable economic solvency for the country.
To reduce poverty and generate employment opportunities, more efforts are needed to establish agro-based industries as well as to raise agricultural production. This will ensure protection and fair prices of agricultural products and employment of a huge number of unemployed people. In order to create further employment opportunities beyond the agricultural sector, initiatives should be taken to set up small, medium and large industries across the country. If these types of industries are set up in a planned way, then unemployment rates will decline and poverty alleviation will be accelerated.
This prevailing macro environment has a dominant impact on modernisation agenda for the banking business in Bangladesh. It would be a risky proposition to join the race of global modernisation without absolute understanding of the country situation. Any developmental or modernisation agenda needs to be thoroughly validated with the existing status of targeted stakeholders rather than comparing with global initiatives and expected benefits. 'One size fits for all' strategy would be detrimental to the investment of a company that may make the initiative and overall, would affect the national economy.
For example, while there are high-credit risks in lending large working capital for industrialisation, it would be rather more effective in providing capital supports to agro-based SMEs which would stimulate the national economy, reduce unemployment and ultimately alleviate poverty. However, Banks can still contribute to the endeavour of inviting FDI through providing funding support in joint ventures, cross-border partnerships, becoming banking partner of donor funded projects etc. This would facilitate speeding up of the country's infrastructure developments.
The writer is managing
director of UCB,
[email protected]