Taking a new look at banking in Bangladesh
Wednesday, 8 April 2009
Mahmud ur Rahman Choudhury
Private commercial banks have so much of money now that they do not know what to do with it and so they have started reducing interest rates on deposits putting the screws on the common people who depend on these interest earnings to provide them with some extra "liquidity" to tide them over difficult times or to cater to extra expenses such as marriages or expenses for children's educations.
However, banks were careful in not reducing lending rates, at least not till the writing of this piece; lending rates are still hovering around 15%. By reducing deposit rates and by not reducing lending rates, banks have created for themselves an opportunity to make a lot of extra money which will go to the pockets of a few share-holders - that's neither helping the economy nor encouraging investments. Who's going to borrow money from banks at an interest rate of 15% plus banking charges to invest in businesses and industries in these times of economic recession when returns are as low as 1%, if at all? Most businesses and industries are happy if they can break-even.
Banks provide us with certain essential services without which we cannot think of working and living in the modern world. If we have more money than we need at the moment, we deposit it in banks for safekeeping; if we need to transfer money to someone, we do it through cheques, letters of credit, drafts or other such banking devices; if we need to set up an industry and we do not have enough money, we go to banks to borrow money and even more amazingly, now-a-days we even borrow money from banks to buy a piece of land, a car, an apartment or computer. Banks do all these things not out of any altruistic motives of helping us out of our financial problems or difficulties but for the pure and simple purpose of earning a profit. For every financial service a bank provides, it takes a fee or a service charge along with a hefty interest on the borrowings. To banks, money is a commodity to be bought and sold at the highest possible profit and most of the money they trade in, does not belong to them at all but belongs to people who deposit the money in banks. Unregulated by the State, the profit motive and greed can overcome every other consideration and lead to the sort of financial and economic crisis that we see devouring the world right now.
Banks in Bangladesh, particularly the privately owned ones, are no different than banks anywhere else, in the sense that they will attempt to make a buck if they can, however immoral the act is, both from the point of view of law and morality. The realities of Bangladesh however, are different from many other parts of the world; a majority of our people are so poor that they can hardly afford two square meals a day and naturally banks to do not provide access to such people because such people are not really "invest-able" and they do not have the means to permit banks to garner profits. Taking advantage of these facts certain people have come up with the idea of micro-credits, that is there are banks such as the Grameen Bank which loan out small amounts of money to poor people, who are then "enabled" to engage in economic activities of sorts and the banks collect back its money with a hefty interest from the earnings from these poor people. This process does not allow the poor to get rich but it does allow them to survive while the bank gets richer and richer. Consider that Dr. Yunus, who made the Grameen Bank and popularized the idea of micro-credits world-wide, has an office building rising 16 floors, has won the Nobel prize for Peace and has stakes in booming businesses like the Grameen Phone but the millions of poor to whom he lends money are only slightly better-off then they were before - nothing compared to what Dr. Yunus has gained for himself.
To an absolute extent banks in Bangladesh are preserves of the rich and the powerful who have little if any moral obligations towards anyone least of all to the common man or woman and who have no scruples in maximizing profits in whatever way they can. The decade of the 1990s saw a massive proliferation of private banks in Bangladesh and those who invested in and sponsored these banks had massive amounts of surplus money which they needed to put somewhere and so our Nation's politicians, many of whom were themselves masters of such money, with the active support and participation of the State's financial and other regulatory institutions found a way out to secure these colossal fortunes through the establishment and institution of banks. Having done that, they went into "money-lending" on a large scale to others with similar morals and proclivities who then comfortably defaulted on those loans and the term "loan defaulter" was coined and caught public attention. The later part of the 1990s and the first half of the decade of 2000 witnessed a spate of these defaults but that in no way affected or deterred these banks because they had practically nothing to lose - it was the depositor's money going out and there were millions upon millions of such depositors. Inspite of these defaults the banks continued posting profits and vied with each other in paying their executives salaries which at one stage reached the astronomical sum of Taka 0.7 million (7.0 lakh) a month for a Managing Director.
All of these were possible because banks were charging 14 to 16 per cent interest rates on lending and hefty service charges for lengthy procedures. There are of course, no businesses or industries in Bangladesh or anywhere else in the world which could generate enough returns to service these loans, debts and interests year after year and so there were defaults which banks then recycled through a process called "re-scheduling". All this while, the State's financial and regulatory authorities turned a blind eye to these activities on the contention and false justification that money was circulating and if some of it didn't come back it was acceptable because there was enough to go round. The State was benefiting too because banks deposited money to the Central Bank, paid whatever taxes they felt like and lent money to the Government as well, when called upon to do so. The State spent this money in a massive proliferation of bureaucracy, administration, the military and the all important Annual Development Programme. Everyone was happy except for the millions of poor relegated to the hinterlands of rural-agricultural Bangladesh.
It is for all these reasons that we need to take a new look at banking in Bangladesh. Banks must be persuaded by regulations and monitoring to invest, at low profit margins, in sectors such as agriculture, small cottage enterprises and in other small businesses in villages and sub-urban areas which employ most of our populace and where most of our people live. Banks also must be taxed heavily on both corporate profits and individual earnings, so that some of the money the banks and bankers make can be plowed back by the State to the real stake-holders of this State - the 150 or 160 million poor people who populate Bangladesh - in the form of subsidized education, health-care but, above all, food. It is only by such means - taking some of the money from the rich and giving it to some of the poor - that we can really come out of the poverty-trap. This is not to discourage private enterprise or the motive for earning money; this is to encourage it because by such re-distribution of wealth, in the long term there will be more people with more money to keep in banks and to borrow from banks. Banks ultimately will make more money and be better off and so will the rest of the Nation.
(The author is the Editor of The Bangladesh Today. He may be reached at:editor@thebangladeshtoday.com)
Private commercial banks have so much of money now that they do not know what to do with it and so they have started reducing interest rates on deposits putting the screws on the common people who depend on these interest earnings to provide them with some extra "liquidity" to tide them over difficult times or to cater to extra expenses such as marriages or expenses for children's educations.
However, banks were careful in not reducing lending rates, at least not till the writing of this piece; lending rates are still hovering around 15%. By reducing deposit rates and by not reducing lending rates, banks have created for themselves an opportunity to make a lot of extra money which will go to the pockets of a few share-holders - that's neither helping the economy nor encouraging investments. Who's going to borrow money from banks at an interest rate of 15% plus banking charges to invest in businesses and industries in these times of economic recession when returns are as low as 1%, if at all? Most businesses and industries are happy if they can break-even.
Banks provide us with certain essential services without which we cannot think of working and living in the modern world. If we have more money than we need at the moment, we deposit it in banks for safekeeping; if we need to transfer money to someone, we do it through cheques, letters of credit, drafts or other such banking devices; if we need to set up an industry and we do not have enough money, we go to banks to borrow money and even more amazingly, now-a-days we even borrow money from banks to buy a piece of land, a car, an apartment or computer. Banks do all these things not out of any altruistic motives of helping us out of our financial problems or difficulties but for the pure and simple purpose of earning a profit. For every financial service a bank provides, it takes a fee or a service charge along with a hefty interest on the borrowings. To banks, money is a commodity to be bought and sold at the highest possible profit and most of the money they trade in, does not belong to them at all but belongs to people who deposit the money in banks. Unregulated by the State, the profit motive and greed can overcome every other consideration and lead to the sort of financial and economic crisis that we see devouring the world right now.
Banks in Bangladesh, particularly the privately owned ones, are no different than banks anywhere else, in the sense that they will attempt to make a buck if they can, however immoral the act is, both from the point of view of law and morality. The realities of Bangladesh however, are different from many other parts of the world; a majority of our people are so poor that they can hardly afford two square meals a day and naturally banks to do not provide access to such people because such people are not really "invest-able" and they do not have the means to permit banks to garner profits. Taking advantage of these facts certain people have come up with the idea of micro-credits, that is there are banks such as the Grameen Bank which loan out small amounts of money to poor people, who are then "enabled" to engage in economic activities of sorts and the banks collect back its money with a hefty interest from the earnings from these poor people. This process does not allow the poor to get rich but it does allow them to survive while the bank gets richer and richer. Consider that Dr. Yunus, who made the Grameen Bank and popularized the idea of micro-credits world-wide, has an office building rising 16 floors, has won the Nobel prize for Peace and has stakes in booming businesses like the Grameen Phone but the millions of poor to whom he lends money are only slightly better-off then they were before - nothing compared to what Dr. Yunus has gained for himself.
To an absolute extent banks in Bangladesh are preserves of the rich and the powerful who have little if any moral obligations towards anyone least of all to the common man or woman and who have no scruples in maximizing profits in whatever way they can. The decade of the 1990s saw a massive proliferation of private banks in Bangladesh and those who invested in and sponsored these banks had massive amounts of surplus money which they needed to put somewhere and so our Nation's politicians, many of whom were themselves masters of such money, with the active support and participation of the State's financial and other regulatory institutions found a way out to secure these colossal fortunes through the establishment and institution of banks. Having done that, they went into "money-lending" on a large scale to others with similar morals and proclivities who then comfortably defaulted on those loans and the term "loan defaulter" was coined and caught public attention. The later part of the 1990s and the first half of the decade of 2000 witnessed a spate of these defaults but that in no way affected or deterred these banks because they had practically nothing to lose - it was the depositor's money going out and there were millions upon millions of such depositors. Inspite of these defaults the banks continued posting profits and vied with each other in paying their executives salaries which at one stage reached the astronomical sum of Taka 0.7 million (7.0 lakh) a month for a Managing Director.
All of these were possible because banks were charging 14 to 16 per cent interest rates on lending and hefty service charges for lengthy procedures. There are of course, no businesses or industries in Bangladesh or anywhere else in the world which could generate enough returns to service these loans, debts and interests year after year and so there were defaults which banks then recycled through a process called "re-scheduling". All this while, the State's financial and regulatory authorities turned a blind eye to these activities on the contention and false justification that money was circulating and if some of it didn't come back it was acceptable because there was enough to go round. The State was benefiting too because banks deposited money to the Central Bank, paid whatever taxes they felt like and lent money to the Government as well, when called upon to do so. The State spent this money in a massive proliferation of bureaucracy, administration, the military and the all important Annual Development Programme. Everyone was happy except for the millions of poor relegated to the hinterlands of rural-agricultural Bangladesh.
It is for all these reasons that we need to take a new look at banking in Bangladesh. Banks must be persuaded by regulations and monitoring to invest, at low profit margins, in sectors such as agriculture, small cottage enterprises and in other small businesses in villages and sub-urban areas which employ most of our populace and where most of our people live. Banks also must be taxed heavily on both corporate profits and individual earnings, so that some of the money the banks and bankers make can be plowed back by the State to the real stake-holders of this State - the 150 or 160 million poor people who populate Bangladesh - in the form of subsidized education, health-care but, above all, food. It is only by such means - taking some of the money from the rich and giving it to some of the poor - that we can really come out of the poverty-trap. This is not to discourage private enterprise or the motive for earning money; this is to encourage it because by such re-distribution of wealth, in the long term there will be more people with more money to keep in banks and to borrow from banks. Banks ultimately will make more money and be better off and so will the rest of the Nation.
(The author is the Editor of The Bangladesh Today. He may be reached at:editor@thebangladeshtoday.com)