Revamping the financial sector

The country's financial sector, dominated by banks, has not been in good shape for many years. Economists and financial analysts could not but withhold their negative comments on the poor performance of the sector. They have been particularly critical of the unpalatable developments in the banking industry. Some leading economists, however, consciously distanced themselves from any severe criticism. They have preferred making a few soft observations that would not hurt anybody. Of late, the situation in the financial sector has deteriorated so much that these people could not hide their deep frustration over the goings-on in the banking sector in particular.
Thus, the country's senior-most and venerated economist Prof. Rehman Sobhan, while speaking at a recent SANEM event, said the default culture has progressively become a part of the business model to stay competitive. He explained how a politically privileged class has gone on multiplying their fortunes by 'rescheduling and defaulting' loans. Another noted economist Dr Wahiduddin Mahmud at another event held recently lamented how efforts made some years back to streamline the operations of boards and overall management of banks have lately been diluted much to the benefit of sponsor directors and errant clients of banks.
The negative developments in the financial sector, according to a report published in this paper in the last week of February, have been taking a toll on the country's overall economy. The financial sector reportedly experienced stunted growth in the last fiscal year---FY2022-23---with its two key constituents, banking and insurance, performing poorly. The financial sector growth tumbled to 2.55 per cent in the last FY, compared to 5.87 per cent in the previous fiscal. Factors such as loan scams, soaring non-performing loans, problems with lending rates and subdued demand for funds from the private sector are listed as reasons for the poor performance of the financial sector. The central bank with the government being instrumental in the background is out to amend its past mistakes involving the composition of boards of banks and non-bank financial institutions and other compliance issues. The change in regulatory approach, however, has not come spontaneously. All those are included in the list of dos and don'ts that the International Monetary Fund (IMF) tagged with its US$ 4.7 billion loan.
It is no secret that the Bangladesh Bank is finding it truly difficult to push through even soft reforms in the financial sector at least for a couple of reasons. Firstly, the regulator has yet to discard the soft approach towards the errant bank sponsors and delinquent large borrowers. Secondly, the people who are largely responsible for ongoing crisis in the country's financial sector are still active in the banking industry, using their strong political links. The central bank has been issuing circulars one after another in recent weeks in an attempt to make changes suiting the IMF recipe. These measures would certainly encourage the multilateral lender to make available the remaining tranches of its loan, but the outcome of putting the banking sector on a strong footing remains in doubt. The current state of affairs in this vital sector of the economy demands deep-seated reforms that are unlikely to happen anytime soon.