The central bank of the country Bangladesh Bank (BB) is entrusted with the responsibility of regulating and controlling the domestic banking sector. As has been the usual practice for decades, the government had never issued any written directives to BB regarding policy or regulatory decisions related to banking sector in the past. But as reported in the print media recently, the Ministry of Finance has started issuing instructions to BB on different matters during the current tenure of the present government. Apparently, the ministry has been interfering with decisions that are under the BB's jurisdiction, and some of these interferences may have gone against the interests of depositors. The legitimate authority of the central bank is being challenged and weakened in the process, and collateral damages to the sector may have been on the rise.
Constituted and run as the country's central bank under the Bangladesh Bank Order 1972, Bangladesh Bank (BB) serves as the supervisory cum regulatory authority of the nation's banking sector. Although the government had some control over BB as per this order, that scope was withdrawn by repealing the section 9(1) in 2003. However, the order provides for a coordination council headed by the finance minister that is supposed to coordinate the revenue, monetary and exchange rate policies. Other than this committee, the government has no other legal scope to control BB. Although the commercial banks operate their businesses with money deposited by the public, the depositors have in fact no direct control over their deposits. Therefore, ensuring the security and proper utilisation of these deposits through regulatory means is the principal function of the central bank.
On looking back, it is found that Bangladesh Bank had taken numerous decisions during the previous decade on approval of new banks, concessions to loan defaulters, and fixing the deposit and lending rates in accordance with the desire and advice of the government high-ups. However, most of those wishes and advices were passed on either orally, or through informal meetings. But astonishingly, even a written order was issued recently by the finance ministry to extend special facility to a particular group of companies. Besides, meetings were called and instructions were issued to the central bankers for facilitating investment of additional money in the stock market through banking channel.
The latest twist in this interference saga has been the decision taken by the Financial Institutions Division of the Ministry of Finance to sign annual performance agreement (APA) with Bangladesh Bank with effect from 2022-23. Side by side, the concerned division has also issued letters to Bangladesh Securities and Exchange Commission (BSEC) and the Insurance Development and Regulatory Authority (IRDA) to sign such agreements. Earlier, the division has been signing APAs with all state-owned banks as well as the Microcredit Regulatory Authority (MRA). But the relevant law clearly does not provide for supervision of BB by any entity belonging to the executive branch. Similar to central banks in other countries, BB can only be held accountable by the legislature.
Experts have been publicly claiming in the recent past that Bangladesh Bank appears to have become a department under the Ministry of Finance despite its legal cover of autonomy in framing and implementing policies, rules and regulations. Besides, the concerned ministry is not supposed to issue any directives to the central bank in a free market economy. But many crucial decisions were taken during 2018-19 regarding reduction of interest rates and reserve ratios through holding meeting with bankers by the concerned minister at a city hotel. This kind of interference could not be imagined even up to 2010. The central bank officials undoubtedly possess sufficient knowledge, experience, and expertise on the nitty-gritty of banking policies. Consequently, they should be allowed full freedom and opportunity to take decisions. Otherwise, irreparable harm may be caused to the sector alongside collateral damages to the country's economy.
According to the Bangladesh chapter of Transparency International (TIB), three handicaps broadly exist in the supervisory cum regulatory functions of the central bank. The first one is limitations in its legal cum policy framework that curtails its independence, limits its role as a regulator, and provides scope for interferences by businesses and politicians. The political interferences mainly emanate from businessmen belonging to the ruling party. They initiate changes in laws, rules and policies that facilitate their influence and control over the banking sector. As mentioned above, dual control of the sector by the Ministry of Finance also curbs the independence of BB and creates hindrances in its operations. The vested coteries allegedly influence the banks by utilising political connections, make BB amend policies in accordance with their preferences, force the central bank to change supervisory decisions, ignore rules and regulations, and also create syndicates for award of loans by undermining the independence of BB.
According to the Basel Committee on Banking Supervision, relevant laws in Bangladesh often clash with the core principles of effective banking supervision devised by it with regard to the independence, objectives, responsibilities, powers etc. of the central bank. The Basel principle on the duties and objectives of supervisory authority for establishing a healthy and secure arrangement for banks has been only partially met in Bangladesh. Similarly, the Basel principle on establishing a framework for independence and accountability of the supervisory authority has been only partially achieved because of the scope for government interference. The principle of a clear and transparent process for appointment and removal of the BB chief executive and members of its board is fully lacking in the absence of such legal provisions. Besides, the principle of granting power to the supervisory authority for awarding punishment has been only partially met as BB cannot authorise liquidation or merger of banks and removal of directors. Although it enjoys the right to enter any bank for ensuring adherence to rules and regulations, and also has the power to set or amend prudential standards, these are hindered by political cum administrative interferences, as well as dearth of proper applications.
Banking experts are critical that the Governor, Deputy Governors and members of the Board of Directors of Bangladesh Bank are appointed by the Ministry of Finance. For this reason they lack the courage to ignore or challenge the decisions of the ministry, as was evident during a recent meeting chaired by the finance secretary, where BB and BSEC were instructed to take action in line with the meeting's recommendations. As noted earlier, this kind of interference in the workings of BB and BSEC has now become a norm. There are even allegations that the ministry is passing on decisions to the Deputy Governors after summoning them by violating the chain of command, as a result of which the regulatory control of BB over the banking sector is being jeopardised. This can never augur well as it strikes at the very root of central bank's autonomy and is bound to negatively impact on the overall performance of the financial sector. It appears that genuine democratic governance and political goodwill at the highest level are required for rectifying the situation.
Dr Helal Uddin Ahmed is a retired Additional Secretary and former Editor of Bangladesh Quarterly. hahmed1960@gmail.com