Strategic measures to reinforce the commercial banks
Tuesday, 7 April 2009
Salahuddin Ahmed
A sound banking system is essential for a stable economy. Banks play a crucial role in any economy providing service to the investors. Their lending involves risks. Collapse of the banking system or even a single bank could spell disaster for an economy. An analysis of the ongoing US economic crisis, shows the how the banks and financial institutions contributed to the worst economic disaster in the history of the USA. It has been identified that the failure of the banks to properly use various played a big role in the economic gloom. The banking system across the world was simply enable to return the savers' money. Imprudent use of funds by banks caused the crisis.
How far the banking system in developing countries face the challenge due to the ongoing global recession remains to be seen. The Bangladesh Bank should, however, be cautious in handling the situation.
The government should carefully regulate and supervise the banking system. According to Dhaka Stock Exchange statistics, market capitalisation of banking stocks was Tk 354.53 billion (35,453 crore) at the end of March 2008, which came down to Tk 271.55 billion (27,155 crore) on March 23 this year. The changes in investors' trading behaviour and psychological pressure possibly stemmed from the ongoing global financial crisis. The continued decline in banking stocks transaction could have a negative impact on the market.
Banks across the world are suffering due to the ongoing global economic meltdown. The banks in Bangladesh need to have resilience to survive this turmoil. After mauling the rich and the wealthier developing nations, "a third wave from the global financial crisis is now hitting the world's poorest, most vulnerable countries," said IMF managing director Dominique Strauss-Kahn. It is not yet fully clear how far the coming wave would hit the poor countries following what the IMF predicted. The World Bank is having trouble getting rich nations contribute just 0.7 per cent of their stimulus packages estimated at less than $10 billion in all, to fund the poor nations hurt by the global decline. It is now a reality that the banks need to take strategic decisions to survive the situation.
What strategic policies banks should adopt to stay off the crisis is a big question. In this grim situation several regional banks in the USA have of late reported up ticks in net interest margin, one of the most fundamental drivers of bank profits, as cut-price funding and choosier loan policies are making it easier for them to borrow money at a low rate, lend it at a higher rate, and grab the difference. Net interest margin is the percentage difference between the interest income produced by a bank's loans and investments and the interest paid on certificates of deposit, savings accounts and other deposits. US Bancorp's net interest margin rose to 3.8 per cent in the fourth quarter from 3.5 per cent a year earlier, driving a 23 per cent annual bump in interest income. Another regional bank, BB&T Corp., said its net interest margin rose to 3.7 per cent in the fourth quarter from 3.5 per cent a year earlier, a significant change when the slightest bump translates to a boost in earnings. All these could be lessons for the Bangladeshi banks to learn in opting for the best possible decisions.
Again it is also understandable that the banks need to anticipate the future financial trends. They need to make policies not only to tackle the current situation alone, but also to take steps to better fight the future financial crisis. Since banks can be affected by the global recession, they need to create an active but carefully balanced engagement with global finance. They need to exploit the benefits of opening up to reputed foreign banks and foreign equity listings to avoid a build-up of excessive exchange reserve in the economy. For a small economy like Bangladesh it is extremely significant to avoid building up of excessive exchange reserve. Again banks need to create the conditions for market discipline to work well. Again these financial institutions need to promote a broader range of financial services with greater reach to small and medium enterprises, households and so forth. This agenda requires not only an articulate policy on such matters as macro stability, privatisation, taxation, and the building of information and legal infrastructure, but also efforts to avoid assembling out to remove the distortion that slow down the deepening of equity-based finance.
Since market capitalisation of various banks in Bangladesh is already in decline, measures should be taken so that the situation does not get worse. There are various approaches Bangladesh can undertake to deal with the falling market capitalisation of various banks. Approaches include relying on existing shareholders as much as possible, and if necessary, seeking a domestic merger partners. Sales to other domestic entities and taking the banks into state ownership if their market shares continuously decline in value could also be options. Other options could be seeking new foreign partners allowing their strategic stakes or take-over of the failed banks.
The Bangladesh economy is already exposed to the ongoing economic turmoil. The Asian Development Bank (ADB) predicted the current fiscal year's growth at 5.6 per cent, down by 0.6 percentage points from the previous year and around one percentage point lower than the central bank's projection of 6.5 per cent. In these circumstances, a collapse of the banking system or a particular bank could make the situation worse sooner than later. Only some specific and strategic measures can reasonably be expected to reduce the risk.
An MBA student and graduate assistant, Ashland University, OH, USA, the writer can be reached at E-mail: sahmed@ashland.edu
A sound banking system is essential for a stable economy. Banks play a crucial role in any economy providing service to the investors. Their lending involves risks. Collapse of the banking system or even a single bank could spell disaster for an economy. An analysis of the ongoing US economic crisis, shows the how the banks and financial institutions contributed to the worst economic disaster in the history of the USA. It has been identified that the failure of the banks to properly use various played a big role in the economic gloom. The banking system across the world was simply enable to return the savers' money. Imprudent use of funds by banks caused the crisis.
How far the banking system in developing countries face the challenge due to the ongoing global recession remains to be seen. The Bangladesh Bank should, however, be cautious in handling the situation.
The government should carefully regulate and supervise the banking system. According to Dhaka Stock Exchange statistics, market capitalisation of banking stocks was Tk 354.53 billion (35,453 crore) at the end of March 2008, which came down to Tk 271.55 billion (27,155 crore) on March 23 this year. The changes in investors' trading behaviour and psychological pressure possibly stemmed from the ongoing global financial crisis. The continued decline in banking stocks transaction could have a negative impact on the market.
Banks across the world are suffering due to the ongoing global economic meltdown. The banks in Bangladesh need to have resilience to survive this turmoil. After mauling the rich and the wealthier developing nations, "a third wave from the global financial crisis is now hitting the world's poorest, most vulnerable countries," said IMF managing director Dominique Strauss-Kahn. It is not yet fully clear how far the coming wave would hit the poor countries following what the IMF predicted. The World Bank is having trouble getting rich nations contribute just 0.7 per cent of their stimulus packages estimated at less than $10 billion in all, to fund the poor nations hurt by the global decline. It is now a reality that the banks need to take strategic decisions to survive the situation.
What strategic policies banks should adopt to stay off the crisis is a big question. In this grim situation several regional banks in the USA have of late reported up ticks in net interest margin, one of the most fundamental drivers of bank profits, as cut-price funding and choosier loan policies are making it easier for them to borrow money at a low rate, lend it at a higher rate, and grab the difference. Net interest margin is the percentage difference between the interest income produced by a bank's loans and investments and the interest paid on certificates of deposit, savings accounts and other deposits. US Bancorp's net interest margin rose to 3.8 per cent in the fourth quarter from 3.5 per cent a year earlier, driving a 23 per cent annual bump in interest income. Another regional bank, BB&T Corp., said its net interest margin rose to 3.7 per cent in the fourth quarter from 3.5 per cent a year earlier, a significant change when the slightest bump translates to a boost in earnings. All these could be lessons for the Bangladeshi banks to learn in opting for the best possible decisions.
Again it is also understandable that the banks need to anticipate the future financial trends. They need to make policies not only to tackle the current situation alone, but also to take steps to better fight the future financial crisis. Since banks can be affected by the global recession, they need to create an active but carefully balanced engagement with global finance. They need to exploit the benefits of opening up to reputed foreign banks and foreign equity listings to avoid a build-up of excessive exchange reserve in the economy. For a small economy like Bangladesh it is extremely significant to avoid building up of excessive exchange reserve. Again banks need to create the conditions for market discipline to work well. Again these financial institutions need to promote a broader range of financial services with greater reach to small and medium enterprises, households and so forth. This agenda requires not only an articulate policy on such matters as macro stability, privatisation, taxation, and the building of information and legal infrastructure, but also efforts to avoid assembling out to remove the distortion that slow down the deepening of equity-based finance.
Since market capitalisation of various banks in Bangladesh is already in decline, measures should be taken so that the situation does not get worse. There are various approaches Bangladesh can undertake to deal with the falling market capitalisation of various banks. Approaches include relying on existing shareholders as much as possible, and if necessary, seeking a domestic merger partners. Sales to other domestic entities and taking the banks into state ownership if their market shares continuously decline in value could also be options. Other options could be seeking new foreign partners allowing their strategic stakes or take-over of the failed banks.
The Bangladesh economy is already exposed to the ongoing economic turmoil. The Asian Development Bank (ADB) predicted the current fiscal year's growth at 5.6 per cent, down by 0.6 percentage points from the previous year and around one percentage point lower than the central bank's projection of 6.5 per cent. In these circumstances, a collapse of the banking system or a particular bank could make the situation worse sooner than later. Only some specific and strategic measures can reasonably be expected to reduce the risk.
An MBA student and graduate assistant, Ashland University, OH, USA, the writer can be reached at E-mail: sahmed@ashland.edu