Overcoming financial sector ills through good governance

Comprising money and capital markets, the financial markets are classified mainly in accordance with the final maturity of their instruments. Money market usually includes financial assets that have short or medium-term duration. These assets are highly marketable and carry a lower degree of risk. Capital market, on the other hand, includes instruments having longer-term maturity and often with lesser liquidity like stocks and bonds. The money market encompasses commercial banks as well as some security dealers, and its instruments include Treasury bills, commercial papers and negotiable certificates of deposits. The banks acquire demand and time deposits from individual customers, companies and governments, and conversely offer loans and investment capital to the business sector.
The World Bank has been engaged in a dialogue on financial sector issues with the Government of Bangladesh since 1988. It has identified three principal problems that afflicted the financial system here - a deficient legal framework, poor governance and a weak central bank. Despite recent gains in depth, the financial system in Bangladesh remains shallow and the sector's contribution to GDP (gross domestic product) has remained almost static for many years. Although policy reforms have been undertaken in the past, including deregulation of interest rates, strengthening of standards of loan classification and provisioning, and elimination of central bank's control over most financial transactions, the financial sector continues to be underdeveloped and inefficient. Poor financial intermediation presents a significant disincentive to faster economic growth.
A 2000 study on the problem of bank loan default found that among a sample group of 125 defaulters, 78 per cent had used political connections to get loans. Among the 37 per cent directly involved with the ruling party, a large proportion had switched political allegiance at least once. The political patronage enjoyed by the loan defaulters and corrupt bankers was sufficiently strong to prevent the then Bureau of Anti-Corruption (BAC) from investigating suspected officials without the clearance of Prime Minister's Office (PMO). However, despite a powerful defaulters' lobby in parliament, some new laws have been enacted during the decade of 2000-2010 to fight the loan-default culture in the banking sector.
The problems currently faced by the financial market in Bangladesh include: (a) an unsustainable level of non-performing loans (NPLs) - probably the highest in South and Southeast Asia, as approximately 10 per cent of the outstanding loan portfolio is non-performing; (b) a low loan recovery rate; (c) an inability on the part of many local banks to meet the capital adequacy requirements; (d) unusually wide spread between lending and deposit rates reflecting systemic inefficiencies and portfolio problems; and (e) pervasive insider lending-cum-trading as well as fraudulent behaviour.
It is also alleged that rampant manipulations exist in the stock market of Bangladesh. The ignorance of the general public and misinformation about the market are made good use of by the manipulators on a regular basis. As a result, little correlation is found between the share prices and company profiles (such as earnings per share, dividend per share, etc.). The share-scam of 1996, dubbed the "slaughter of the innocents", can be cited here as an example. In June, 1996, when a new government assumed office, the All-Share Price Index of Dhaka Stock Exchange (DSE) was 959.05, up from 805 on March 31, 1996. Restrictions on remittance of profit and capital as well as tax on capital gains were already lifted by the previous government. And when the newly installed regime withdrew a one-time lock-in period for investors and allowed 80 per cent loans against stock investments, it opened a flood-gate for manipulators in the stock market.
The index crossed the all-time high mark within July 1996, and on October 01 the DSE index reached an astounding 3688.88. There were already cries of foul-play in the media, but the manipulators did not stop there. The stock market and the kerb market virtually turned into a bazaar in the centre of Dhaka city and people in the rural areas even started to sell their lands with the hope of making quick bucks. The initial public offerings (IPOs) floated by even suspect companies were heavily oversubscribed.
At the end of October 1996, the DSE index had reached the astronomical level of 3012.97, but the euphoria of the public and the greed of the manipulators did not stop there. On November 16, the DSE index touched an unbelievable height of 3627.01, surpassing most stock exchanges in South and Southeast Asia. And at that very juncture, after the manipulators had made huge windfall gains - the bubble burst and the collapse began, reducing many of the unsuspecting speculators to the state of paupers. The slide continued for years together and touched the bottom of 473 in December 1999. After that, it took another decade for the market to recover before another similar collapse was orchestrated in 2010.
Bangladesh's global ranking in terms of financial market development has fallen sharply in recent years - from 66th in 2010-11 to 90th in 2015, 98th in 2016 and 103rd in 2018 (World Economic Forum). Availability and affordability of financial services, ease of access to credit, soundness of vision and mission, operational efficiency, standards of management and good governance, regulatory measures, state of the stock market - all these indicators have demonstrated a deteriorating trend in terms of performance.
Also, the capital market is yet to gain the image of a reliable investment platform and is faced with numerous systemic challenges. In addition, the correlation of widespread corruption to financial and economic ills in Bangladesh is indeed very high. All these pose a serious challenge for the local and foreign investors.
The country's financial sector, therefore, must be repaired and reinvented if the socio-economic growth tempo is to be sustained. It would not be possible to graduate into an upper middle-income country status with such a fragile financial system. Political goodwill at the top is a must for restoring order. Alongside establishing good governance for the purpose, transparency and accountability of all has to be ensured, and the culprits haunting the sector must be brought to book. Only then would people's faith in the sector get restored, and an expeditious march on the path of socioeconomic progress would become a reality.

Dr. Helal Uddin Ahmed is a retired Additional Secretary and former Editor of Bangladesh Quarterly.
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