In this era of rapidly changing global financial environment, people's demand and society's needs are changing at a faster pace. Technological breakthrough also changes everything from customer relationships to business models. As elsewhere, banking in Bangladesh faces a multitude of challenges on the way forward, including adjusting to rapid technological changes in the ways banking services are delivered, risk management and stability challenges posed by increasing financial globalisation, and challenges of harnessing creative energies of all population segments reaching out with environmentally responsible inclusive financing.
There are ample sources of guidance on evolving regulatory discipline and best practice standards in shaping the future path for banking, but usefulness of all these depends crucially on the underpinnings of ethically driven high-quality corporate governance involving the boards and senior managements. Lapses and slippages in ethical standards in bank boards and senior managements had much to do with causing the last global financial crisis, just as in recent local episodes of banking scams and loan fraudulences. As senior management the members of the Association of Bankers, Bangladesh Ltd. (ABB) are fiduciaries safeguarding interests of depositors and other creditors. They should bear this in mind while envisioning their way forward in socially and environmentally responsible banking in Bangladesh over the years to come.
How should the future path of banking in Bangladesh be shaped?
PARADIGM SHIFT IN BANKING ETHOS: The banking sector in Bangladesh has grown several?fold since independence in 1971, in tandem with the uninterrupted spell of steady, stable growth of the country's economy over the last two decades. Beginning as almost wholly state?owned sector making directed loans at prescribed interest rates, banking sector of Bangladesh has undergone successive rounds of major structural and regulatory reforms. It is now transformed into a vibrant private sector-led market-based banking system, largely shaking off the legacy of heavy default culture from the years of directed lending regime.
A major part of the cost of default had to be borne by both the state and entrepreneurs not to speak of customers at large. But thanks to sweeping reforms in the financial sector, Bangladesh economy has been continuing sustained spell of six-plus per cent real annual average GDP (gross domestic product) growth for more than a decade now with the latest score of 6.12 per cent in FY14. Steady and incessant drive of inclusive growth is causing poverty to recede fast; GNI (gross national income) per capita has risen to US$ 1190 in FY14, with a continual uptrend.
Bangladesh has impressive bank account access with low gender and income gaps relative to other South Asian countries. The share in the population above 15 years with a deposit account expanded from 26.7 per cent to 41.3 per cent over the last five years (end 2009-end 2013). In comparison, the average share of the population above 15 years holding an account in 2011 was 33 per cent in South Asian countries, 23.7 per cent in low income countries and 28.4 per cent in lower middle income countries. The participation of bottom 40 per cent population (income) in access to finance is also higher in Bangladesh (35 per cent) than that of India (27 per cent), Pakistan (4.0 per cent) and South Asian nations (26 per cent). Banking sector's assets in Bangladesh has also grown faster than any other South Asian nations. London-based research firm Business Monitor International (2014) found that total banking assets in Bangladesh witnessed a 19.1 per cent compound average growth in the past five years followed by 18 per cent in Sri Lanka, 17.2 per cent in Pakistan and 16.7 per cent in India. Banking assets as a share of GDP (gross domestic product) is second highest in Bangladesh (80 per cent) after India (85 per cent) but much higher than Pakistan (50 per cent) and Sri Lanka (50 per cent). If you add asset held by mobile financial services (20 million) and low end 14 million 10-taka accounts, Bangladesh may as well come out as number one.
Bangladesh Bank (BB) has steered this transformation by continually promoting market development in a broadly stable monetary and inflation environment. BB recognised early on that the conventional short-term business cycle-focused monetary and financial policy approaches are failing to address globally the longer term needs of inclusivity and environmental sustainability. So, mandated as it is by its charter to support output and employment growth besides protecting monetary and financial stability, BB stepped in with initiatives of imparting a deliberate directional bias in financing flows away from speculative and sustainability-harming uses towards IT-enabled inclusive financing of 'green' output initiatives. For that to happen, BB was successful in enthusing socially responsible motivational ethos amongst the captains of the industry.
INCLUSIVE SUSTAINABLE FINANCING: The motivational thrust of ingraining a socially responsible financing ethos continuing since 2008 has sensitised and activated our financial sector in reaching out to the underserved and excluded poorer population segments with the financial services they need. BB-led events like the financial inclusion road-shows have drawn banks and financial institutions into closer contact with their existing and potential new client bases in the poorer communities. This transformation of the mindset of our bankers was led by not only corporate social responsibility but also by motivation to capture business at the lower segment of the customer base.
There is as yet no comprehensive impact evaluation of these initiatives in Bangladesh, but anecdotal evidences indicate that policy support for SME (small and medium enterprises) financing and development of mobile phone-based financial services delivered through hundreds of thousands of local area agents are creating around four hundred thousand new employments every year. Green financing initiatives are likewise spawning new jobs in thousands, in manufacture/assembly, installation and maintenance of solar PV home systems and irrigation systems, energy saving lamps, bio-gas units and so forth. Inclusive financing has upheld real sector output and employment growth momentum while also at the same time enhancing financial stability, reducing credit and liquidity risk exposures of lenders by diversifying and broadening their asset and deposit bases. BB guidance in this respect will soon extend further towards differential loan pricing and perhaps also differential equity margin according to environmental risk grading, entailing lower financing costs of borrowing proposals with low environmental risk grading and encouraging risk-mitigating modifications in the higher risk rated proposals.
The multifaceted financial inclusion initiatives of Bangladesh Bank are enhancing the intermediate target of reducing financial inequality with an ultimate objective of slimming income inequality down with job creation among the un-served and under-served population segments steadying the inclusive growth trajectory. Bangladesh's sustained spell of steady real GDP growth, and its pioneering promotion of socially responsible inclusive, green financing is attracting widespread attention and interest of other countries and supra-nationals like the UN agencies, IMF and WB. Bangladesh Bank was recently awarded 'the Alliance for Financial Inclusion (AFI) Policy Award' for its contribution to substantial expansion of Mobile Financial Services (MFS) in Bangladesh. The recently held Global Green Growth Forum (3GF) in Copenhagen also recognised Bangladesh's pioneering broad-based green banking initiatives.
RAPID DIGITISATION IN BANKING SECTOR: A countrywide massive modernisation of the financial sector IT infrastructure, including fully automated online settlement of paper-based and electronic fund transfers, online credit information and supervisory reporting etc. have spawned exponential growth of mobile phone banking, vastly benefitting the underserved poor. The rapidly digitised banking enabled ultra-pacing mobile financial services will encourage the women more to participate in the financial services narrowing the gender disparity down since it may not even require their physical presence in the financial institutions to receive financial services. BB is active in spearheading initiatives of putting in place and upgrading countrywide connectivity backbone for the interbank settlements infrastructure. Individual banks will need to be correspondingly proactive in installing and upgrading their own IT platforms in line with rapidly growing and evolving needs. With the progress already achieved in online interbank settlements and in mobile telephony, banks can and should now move fast in expanding mobile phone/smart card-based banking services reaching out to new depositor and borrower customers in rural and floating urban populations.
The imminent wide-advent of digital transaction by the virtue of quantum drive in paperless e-banking entails IT-related various risks like viruses, hackers, natural disasters, operational errors, fraudulent activities and other threats from cyber crimes. So, the service providers should have the pragmatic understanding of IT system monitoring and risk-based auditing to encounter IT-related intrusion minimising the residual risk at most to insulate the financial transaction from IT vulnerabilities since a single mishap may create devastating effect on the entire financial system. To strengthen the supervisory capacities of its officials BB has already embarked on intensive training courses on the Cyber Security and IT Risk Management to shield the financial stability from toxicities of IT risks, including cyber crimes, failures and vulnerabilities.
Dr. Atiur Rahman is Governor of Bangladesh Bank. The article is based on the speech he gave at the National Conference of the Association of Banks, Bangladesh Ltd. ( ABB) held on November 01, 2014 in Dhaka