“It is not necessary for businessmen to own or run the banks”
External interference, as well as the unprofessional management of the country’s financial institutions, seem to be detrimental to the growth of the banking sector. Even senior central bank officials have expressed concern about this.
The Business Standard recently spoke to economist Dr Saleh Uddin Ahmed, former governor of Bangladesh Bank (BB) to get his views.
A call for the decoupling of corporate entities from financial institutions was recently made by Bangladesh Bank Governor Fazle Kabir. Do you agree with this call?
In a sense, he is right. If the ownership of a bank and the legal person are separated, it will be better. Because a bank is not a business like the automotive or pharmaceutical industry.
A bank is a special institution that holds the lion’s share of depositors’ money as its base capital. A bank does business with this capital. Here, the contributions of businessmen and bank owners are not huge.
When a bank is corporately owned, the owners try to cash in the bank despite the existence of rules prohibiting this practice. But most of the time, the owners take out loans from their own banks. And deserving customers are often denied loans.
Another problem with such ownership is that there is still no level playing field as companies that own a bank always have the upper hand. This is the practice in Bangladesh. It’s not really good.
In other countries, even in India, bank professionals or financial system experts in general own the banks. A few wealthy corporations own financial institutions, but their presence is minimal.
What I mean is that banks are different entities because bank management has to follow certain “prudential standards” to decide who is eligible for the loan, who is not, how much money can be loaned and what is the payment period. Such decisions should only be made by true professionals.
Companies that own banks sometimes act as a pressure group. They try to influence the global economy as businessmen. At the same time, they also display their power as bank owners. This practice in no way guarantees a competitive business environment.
Wealth is concentrated among a few businessmen in Bangladesh. If companies are decoupled from financial institutions, how do banks create their capital?
It is not necessary for businessmen to own or run the banks. How much money does it take to start a bank? Tk400 crore is enough as base capital. Why not 400 people deposit Tk 1 crore each and share ownership of a bank. In many countries, small shareholders own banks.
Banking is not a sector like technology where companies like Grameenphone need Tk 10,000-15,000 crore of capital investment.
A bank is a knowledge-based business. Banking professionals will manage the financial system and be paid to do so. Bank staff will manage the system, and administrators or owners’ representatives will set policies, separately. There is no need for rich businessmen.
On the contrary, what we see in Bangladesh is that the managers influence the general managers and the general managers prefer to stay in the good books of the managers to gain undue privileges.
You talked about big investments. I don’t think it matters. You can increase the capital base by floating more shares. As your income increases, you can pay higher dividends.
By doing so, you can increase your capital base. You do not need to integrate companies into the management of the bank.
There have been recent reports of the Ministry of Finance interfering in the affairs of the Bangladesh Bank. How important is central bank independence when formulating monetary policy?
Sure. If BB does not enjoy freedom in formulating monetary policies that are both highly professional and highly technical, how can it do its job properly?
If there is outside interference from politicians and bureaucrats, the central bank cannot implement monetary policies and properly supervise the banking sector.
In most countries, their central bank is a separate institution. However, there is no way that a central bank can enjoy 100% freedom. Politicians could influence it. Such influence does not mean that they give instructions on how to run a bank. They could make suggestions.
Undue influences prevalent in Bangladesh reduce the effectiveness of BB. Outside interference in a professional and highly technical field is not acceptable.
It is unexpected that a central bank is run by particular ministries or authorities.
In the wake of growing imports, there have been calls to devalue the Taka. To make the Taka more competitive, should we devalue our currency?
Whether devaluing the local currency or fixing the interest rate, the central bank makes decisions taking into account two types of factors: internal and external.
Internally, the BB can make decisions by analyzing the commercial dynamics of the country. But there are many external factors that are beyond BB’s control.
External factors are changes in international trade or the Russian-Ukrainian war which affects the currencies of other countries. The BB makes decisions by balancing the two factors.
My suggestion is that regarding the devaluation of Taka, BB should defer to the market.
Imposing an interest rate of 9 or 6% is by no means predictable. People now show little enthusiasm for saving. By imposing an interest rate of 9%, the banks did not make much profit.
This decision did not benefit anyone. Businessmen don’t just pay the interest rate. There are also other costs such as material cost, management cost, transportation cost, fuel cost and others.
BB devalued Taka. Some other countries, including India, Sri Lanka and Pakistan, have also devalued their currencies.
Currency devaluation helps the export sector to become competitive when competitors’ currencies have been devalued. On the other hand, currency devaluation makes imports expensive. There should be a balance.
Thus, currency devaluation should be market-based.
Sometimes currency devaluation is a necessity. But I would say be careful about misappropriation of money through various means.
Banks were invited to invest in the stock market. What is your observation on this?
This kind of directive should not be given. I will not name any financial instrument in particular. But it seems to me that this directive aims to stimulate a particular bond. This means that the directive was made to maintain vested interests. Banks should decide where depositors’ money will be invested.
Such a directive undermined the mandate of the central bank.
A former senior banker suggested appointing a supervisory board to oversee the banks’ board of directors. What do you think?
I don’t know if the senior banker proposed such an organizational chart for the central bank, or for the other programmed banks.
But the central bank has such platforms: board of directors or governance board and management committee of the central bank.
What we saw in Bangladesh is that some board members who are business people laundered money from their own banks and nobody even knew about it.
Best practice is for board members to monitor every major transaction made by bank owners. There are several examples in Europe and Japan.
It was in this spirit, I think, that the senior banker recommended both boards of directors so that the management of the bank could control money laundering. Because once the money is laundered, it cannot be returned. There is no such example in Bangladesh.