Reforming banking sector to become middle income country

In a developing economy like that of Bangladesh, the banking system mainly mobilises and allocates financial resources directly to the ultimate beneficiaries in an institutional way and thereby enhances the country's economic growth. However, to establish good governance in banking, continuous reforms are needed in tune with transition of economic environment, technological advancements, prudential laws and regulations, accounting standards, supervisory capability of banking regulators and change of techniques to manage operational, credit and market risks.
The financial sector reform programme (FSRP) was launched in Bangladesh under the Financial Sector Adjustment Credit (FSAC) of the World Bank in 1990. It aimed at deregulating gradually the interest rate structure, providing market-oriented incentives for priority sector lending, making subsidies in these sectors more transparent, adopting appropriate monetary policy, improving debt recovery environment and strengthening the capital market. Hallmark, Bismillah Group and the recent state-owned bank loan scams have assumed the proportions of an earthquake for our banking sector. It is now a crucial time for our regulatory authority of the banking sector to re-think whether further structural and policy reforms are required or not. As a supervisory authority, our banking regulator has the prime responsibility to mitigate the volatility in banking sector.  If we fail to ensure good governance in banking sector, the clients will not trust the banks to deposit their hard- earned money there.
At present, 56 scheduled banks and 31 non-banking financial institutions (NBFIs) operate in Bangladesh (source: Bangladesh Bank website). Among the scheduled banks, six new banks were approved in 2012 to include large number of under-banked people to banking channel, to increase the quality of banking services by increasing competition and to meet the unfulfilled demand for credit by the private sector whose needs have grown in line with a fast expanding economy. But the real scenario is reverse as the new banks are competing for the existing clients, rather than creating a new customer base due to a challenging situation. These banks also have a little scope to find credit-worthy fresh clients. As a result, wooing existing customers to develop own customer base is a common phenomenon. Banking inclusion of the under-banked people has also become a difficult task for banks because most of them live in rural areas where banking services are absent.
Establishment and operating cost for providing quality services in rural areas are much higher than revenue generation. The real banking inclusion is only possible if the existing banks open new wings for rural banking service with selective products to have cost efficiency. But allocation of the unrealised cost of rural banking service to core banking can only be possible if banks are strong and sound in terms of asset quality and profitability. A few banks have strong and huge volume of capital for large corporate finance. Due to single borrower exposure limit, a single bank cannot finance a large project. It rather goes for syndication. Political instability which has a negative impact on business growth and profitability also scare a single bank against going for a large finance, to put its core capital in a single bucket.
Irrespective of all negative trends, we have a vision to make Bangladesh a middle-income country within the year 2021. It is the year when we will mark the golden jubilee of Bangladesh's independence. To achieve this vision, we require fast track development and ever-increasing rates of inclusive growth. To ensure economic growth in line with the desired vision, the financial sector should be get top priority.
For infrastructural and industrial development to promote our local industries and to establish regional economic zone to ensure economic growth, huge finance is required. This is difficult for a single financial institution to provide as only a few banks have huge capital base and syndication loan also entails a complex and lengthy process. In this situation, merger and acquisition of banks and NBFIs offer a solution to make the financial sector strong and capable for large finance.
The central bank of a SAARC member-state Sri Lanka recently took initiative for structural reforms of banking and financial sector with merger of banks and finance companies to steer the country towards the goal of a US$ 100 billion economy by 2016 and to establish a strong and dynamic financial sector. The central bank has encouraged consolidation in banking and NBFI sectors using attractive tax concessions offered by the 2014 budget. According to the policy, larger banks and NBFIs will be directed to acquire or merge with smaller banks and NBFIs. State-run banks have also been directed to expand their regional presence and operate with higher levels of capital.
Our banking and financial sector needs to be redesigned to make it stronger to cope up with the country's future economic growth. Because, with a weak financial sector, the country's economic growth is not possible. For achieving growth targeted in the Vision 2021, the Bangladesh Bank should take initiative to make our financial sector strong and create a platform to encourage weaker banks or NBFIs to merge with stronger ones to ensure inclusive development of all regions.
The writer works in a private commercial bank.   [email protected]