The recent discussions and media reports indicate that preparations are afoot to add nine more new banks to the country's financial industry. Industry experts and think-tanks are vocal against this move. Theoretically, one may argue, adding more banks to the banking industry may not be bad. There are many economic and non-economic value additions from each additional entity in the market. More banks mean more investment, more employment, more opportunity and more revenue generation, which collectively contribute to the industry and the country's economy as a whole. Even the market becomes more vibrant and competitive with wider access to the customers.
But, addition of new banks to the market should be commensurate with the country's economic growth. Industry parameters, regulatory capability and market fundamentals have to be well-equipped to accommodate these additional banks. Questions may arise whether these fundamentals of our country are conducive to absorb the burden of new banks. This is, of course, a debatable issue as there are no quantifiable tools and techniques that can assess the foundations of the economy and thus determine the requirements of the number of banks.
However, the situation prevailing in the country's banking industry does not suggest that the market is ready to accommodate more new banks. Strong regulation and on-site as well as off-site supervision are prerequisites for efficient operation of banking system. These regulatory measures are not, unfortunately, up to the mark in our country.
Banks are quite different from any other form of business entity as these institutions are not only the custodian of public money, but they also channel fund from surplus units to deficit units of the economic system. Therefore, banking business has to operate complying with rules and regulations of many domestic and international bodies. For the banks in the country, these include Bangladesh Bank (BB), BSEC (Bangladesh Securities and Exchange Commission), RJS (Registrar of Joint Stock Companies and Firms), NBR (National Board of Revenue), stock exchanges, accounting bodies, ICC (International Chamber of Commerce) and BASEL Committee. In addition, a bank has to maintain correspondent relationship and involve in many cross-border transactions through many counterparts abroad for which a certain standard in terms of compliance has to be maintained at regularity. Therefore, banking is always considered as a highly regulated business all over the world and its implication in the economy is paramount.
Any failure in banking operation severely shocks the whole economy and the country as well. A greater number of banks are usually found in those countries where regulation is very strong and bankruptcy, merger and acquisition are very active measures as part of regulation. Even existence of a deposit insurance corporation (DIC) as an independent body is a must for allowing a large number of banks to operate. Many countries have established this deposit insurance in order to safeguard certain amount of depositors' money regardless of how many banks operate in the market. The USA is a good example where strong regulation, merger, acquisition and bankruptcy act and DIC effectively exist - thereby allowing higher number of banks to easily operate in the country. Nevertheless, large banks are very limited there as only five or six such banks exist in the US market while the remaining ones are small and regional banks.
Canada, on the other hand, is an example where regulation is very strong, foundation is sound and deposit insurance scheme (DIS) is present. Still, only five banks operate in the economy. Of course, there are some foreign banks; however, their activity is very limited. There are many developing countries where regulation is comparatively strong and few of them have DIS, yet the number of banks are very limited. Vietnam can be a good example in this regard as regulation there is comparatively strong and DIS also exists.
REFORMS NEEDED: Our banking sector has developed tremendously over the last four decades with the presence of more than 50 local banks, more than 100 non-banking financial institutions (NBFIs), some development financial institutions (DFIs) and some foreign banks operating in the industry. Both deposits and loan portfolios have increased manifold while diversity has also come to the banking products and services. Technologically, developed products from ATM (automated teller machine) to mobile banking have now come to the doorstep of common people. Competitive environment has been created in the banking industry where access to the common people has also been ensured. However, modernisation of this sector has not yet taken place and even regulatory capability has not been strengthened keeping pace with the growth of this industry.
Bangladesh inherited a dilapidated banking system from erstwhile Pakistan based on which only the number of banks has been increased without making tangible structural development. Since independence, no comprehensive reform has been carried out in this sector. During the 1980s, the FSRP (financial sector reform programme) was undertaken but it could not be claimed that this reform package produced any tangible result in modernising the banking sector and strengthening regulatory capability barring introduction of CLs (Classification of Loans), CIB (Credit Information Bureau) and LRA (Lending Risk Analysis).
The CLs and CIB are still active and believed to have been immensely contributing to the country's loan operation although this is gradually lagging behind in serving the purpose as characteristics and features of loan operation are rapidly changing across the world. The use of LRA has disappeared long ago. Additionally, some special programme was taken during the beginning of this century whereby efforts were underway to bring about some qualitative change in banking operation. Introduction of CRM (Credit Risk Management), ALCO (Asset Liability Committee) and ICC (Internal Control and Compliance) were the achievement of that special programme. Apart from these measures, no comprehensive reform programme has been undertaken in Bangladesh's financial sector and as a result, regulatory capability has not been strengthened, DIC has not been created and there is no effective bankruptcy, merger and acquisition law in our country. Time has come to actively consider these areas and only then the idea of allowing any new bank can be thought about.
POLITICAL CONSIDERATION: While talking about any new bank, some people may argue that historically new banks are approved on political consideration. Anyone taking a look at the ownership structure of first, second and third generation banks can get a clear picture of how politically-influenced decisions were taken while approving new banks.
Once upon a time, there was a clear distinction between politicians and businessmen. Politicians used to make law, which the business community had to abide by. Those days are now gone. Politicians-turned-businessmen and businessmen-turned-politicians have now become commonplace. This is a global phenomenon. Even in the US, politics and business have been mixed up and amalgamated to a great extent. Many high officials in Trump administration responsible for supervising as well as regulating the country's banking sector have strong connection with the business community. US Treasury Secretary Steven Mnuchin have worked in Goldman Sachs Inc. It is alleged that he organised a group of investors to buy a lender, which became OneWest Bank. Joseph Otting was the CEO (Chief Executive Officer) of OneWest and is now running the Office of Comptroller of Currency, which is an independent body of the Treasury Department.
Present regulators of the US, controlled and run by politically motivated personnel, have become lenient towards the business community - particularly to the financial industry. The regulators are now relaxing the requirement of annual to biannual submission of so-called 'living wills' by the bank, which is meant for mapping out the bank's best route to bankruptcy. They are actively considering to relax two more complex and important rules; one is leverage ratio, which limits on how much bank relies on borrowed money, and the other is Volker rule, which restricts the bank from proprietary trading, i.e., bank cannot trade in with their own money.
The recently-revealed Indian loan scandals show how strongly business, banking and other economic activities of the country are politically motivated. So, political motivation and influence have now become part of world politics and economy. Only difference is that this malpractice happens in a legal camouflage in the developed world, whereas the same happens in a very naked form in the developing world, including our country.
Nironjan Roy is a Toronto-based banker.
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