New banks and insurance companies: Problems and prospects

Syed Ejaz Ahsan In a free market economy, firms are free to enter and exit the market according to their strategies. In Bangladesh, there are more than 40 banks in operation. Except one or two, all the banks are doing well. They are earning profit and paying dividend to the shareholders at a higher rate compared to other companies. Moreover, they are operating under strict supervision of the Bangladesh Bank and their activities are being monitored systematically on a regular basis. In addition, implementation of Basel II and Basel III is going to make financial institutions more secure than at any other time. The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face while maintaining sufficient consistency so that this does not become a source of competitive inequality amongst internationally active banks. Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In theory, Basel II attempted to accomplish this by setting up risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability. Basel III is a new global regulatory standard on bank capital adequacy and liquidity agreed by the members of the Basel Committee on Banking Supervision. The third of the Basel Accords was developed in response to the deficiencies in financial regulation revealed by the global financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. So, we see that if the international standard of Basel II and Basel III is implemented banking companies are going to be more secure than any other companies. Regarding business potentials, still there is an unexplored market. Different types of banking products are out of reach of a large percentage of population, especially, those who are living away from the metropolitan areas like Dhaka, Chittagong and Sylhet. In this backdrop, the government is actively considering to issue licences to new banks and insurance companies. This decision is being criticised by different quarters, even the central bank was earlier not in favour of the idea. The banking sector is vital for the economy of a country and any setback in this sector will obviously affect other sectors as well. Any decision regarding this sector needs to be well planned and carefully analysed before taking any steps. But after an in-depth analysis of different aspects of the issue, we find lot of scope for new banks. The banks at present are dealing with limited number of high net-worth clients in urban areas and big business houses which can provide security against their loan. Most of them are from the urban areas of Dhaka, Chittagong, Sylhet and Khulna. Processing a loan proposal for small or large amount involves same procedure and documentations. So, naturally processing a large amount of loan yield greater amount of income for the banks rather than processing small amount of loan. The banks are after the established business houses and some experienced bank officials who have good connections with those business houses are shifting the client base of one bank to other by managing better compensation package from the banks for them. So new entrepreneurship is not developing and small business houses are not expanding. The banks have little choice, because at the end of the day they have to satisfy their clients with higher dividend, enriching the net-worth of the bank as well as securing banks lending. Though the central bank is forcing them to divert a certain percentage of their credit portfolio to the SME sector, but that is not very encouraging for the overall economy of the country. Still the rural economy is out of the reach of the modern banking facilities. Grameen Bank along with other NGOs started providing micro-credit facilities to the rural mass. These organisations have made their fortune, but people have not benefited much through their activities. There is no control of the regulatory authorities and as such they charge very high rates of interest. As such, micro-credit has failed to change the fate of most people, but still the practice is on. The rural people who get the loan even do not know how the interest is being calculated, how much and how long they have to continue to repay for the final settlement of their dues. In this regard, alarming news have shocked the citizens of the country that failing to repay the loan taken from NGOs, some people are selling kidney to repay loans. The NGOs act as 'Kabuliwallas' of the twenty-first century. Instead of allowing the NGOs to function like banks, the government should allow new banks to operate in rural areas under some terms and conditions. The NGOs collect fund from donors at zero rate of interest and lend it at a very high rate of interest to the rural people. There is low regulatory control and the government gets lower rate of tax from these NGOs. The NGOs should concentrate on social activities only like health, education, pollution control and not in business activities. At the initial stage, new banks should design their portfolio investment in rural banking products and afterwards they will be allowed to do normal commercial banking activities like other banks, as the regulatory authority deems appropriate. Rural banking under the strict supervision of the central bank will help flourish the rural economy, develop small and cottage industry, generate employment and increase economic growth. There will be little scope for exploiting people concealing the true rate of interest and other terms and conditions as practiced by NGOs because banks work and operate under the supervision of the Bangladesh Bank. There are dynamic entrepreneurs who love to take challenges and lead the country towards a new direction. If the government offers some incentives to new banks willing to operate mostly in less developed areas, these entrepreneurs would accept the offer. The new banks will generate employment and enhance economic uplift. One thing we have to keep in mind is that we need faster economic growth and without developing the rural economy fulfilment of that objective is impossible. We have to learn how to create opportunities to expand our economic activities to the remotest corner of the country and take our economy to a new height. Another important but neglected sector is our insurance companies. A number of general and life insurance companies are working at present in Bangladesh. General insurance companies minimise the financial loss and secure the business houses from bankruptcy. Life insurance companies through providing compensation and pension policies and such other schemes secure a person from financial uncertainty when they face unexpected miseries in their life. But in some cases there are severe complaints about the activity and marketing system of selling the insurance policies to the people. Some times the insurance agents provide misleading information and use other means to sell the policies. For this reason there is a widespread negative impression about the insurance industry and the people engaged in the business. But we have to understand that all the people in the insurance business cannot be dishonest. Insurance industry can mobilise huge funds and invest it in different sectors of the economy. In developed countries life insurance is popular and at the same time the people think it as a necessity for their uncertain future. In Bangladesh, insurance companies compete for market share of other companies by any means, sometimes they offer unrealistic amount of commission for securing business which reduces their financial ability to settle claims. In some cases the government sponsorship or guarantee can play a vital role. Insurance companies do not come with new products, though there are plenty of scope for new products such as crop insurance, different types of inland travel insurances, credit shield for micro-credit and many more. Research is needed in this regard to introduce new insurance products. If the government addresses these issues, a new horizon will be opened for banking and insurance sector in the country. We have to understand that geographically Bangladesh is a small country. But it is a land of more than 150 million people. It is a huge market with unlimited potentials; we just have to learn how to tap the unexplored opportunities. New banks and insurance companies will not create any problem for the existing ones provided a dynamic government policy and far-sightedness of the entrepreneurs is there to back it up. The writer is faculty, Pen field School and College, and can be reached at email:seahsan@gmail.com