This is not the best of times for global finance. The world economy has been under severe stress following the bankruptcy of Lehman Brothers in September 2008. The fall of the mighty investment bank was a big blow to the global financial system leading to arguably the worst economic crisis since the great depression of 1930s. It is widely believed that the greed of the Wall Street bankers and over expansion of financial sector with inadequate regulation led to the global financial turned economic crisis.
The financial sector of Bangladesh has been largely insulated from the global contagion thanks to less exposure to derivatives and other complex financial products. Nevertheless, it has faced at least four major setbacks during the current regime, not due to any external factors but largely owing to greed, poor regulations and vested political interests.
It started with the crisis in the stock market in 2010-11 that left thousands of investors literally bankrupt. The so-called multi-level marketing (MLM) companies sucked up huge amount of savings from a large number of small savers. Microcredit, which is serving the interest of millions of poor people both at home and abroad, has been the victim of state-led propaganda. Finally, state-owned commercial banks (SCB) have been used not only for automatic monetisation of fiscal deficits (to finance some controversial projects), but were also left unchecked to allegedly misappropriate huge sums of public money.
The report of Ibrahim Khaled Committee is an account of how the stock market was manipulated by some business bigwigs capitalising on their political affiliations. There was literally no response from the authorities when the MLM companies seemingly looted millions from the small savers. Confusion prevails as to who, the co-operatives or the Bangladesh Bank, regulates their businesses.
Microcredit is perhaps the most globalised financial service, as far as financial needs at the bottom of the pyramid are concerned, that has a strong root in Bangladesh. There is a regulatory body, Microcredit Regulatory Authority (MRA), that oversees the sector efficiently. However, the state machinery and a section of media, without understanding the sector, confuse microcredit’s role in poverty alleviation and social development. In fact, the government’s own entity, PKSF, disburses funds to over 257 microfinance institutions (MFI).
Recent developments in some state-owned commercial banks (SCB) are worrisome. These banks have been channelled to monetise fiscal deficits, particularly to finance politically motivated projects (rental power plants, for instance) that don’t get alterative funds owing to governance concerns. This venture has already cost the exchequer dearly, risking the country’s macroeconomic stability.
The unearthing of financial misappropriation in Sonali Bank, the largest SCB, was shocking. According to the Bangladesh Bank, a branch of the Sonali Bank was involved in embezzling of Tk.3,547 crore, from which Tk.2,686 crore went to a little-known business group!
Who is supposed to monitor the activities of the branches? Is it Bangladesh Bank, Ministry of Finance, or Sonali Bank itself? Being the central monetary authority, Bangladesh Bank should be the ultimate authority accountable for this embezzlement. The central bank, under Clause 46(6) of the Bank Company Act 1991, sent a report to the finance ministry when it unearthed massive irregularities and corruption in a Sonali Bank branch. However, it does not have the de facto power to supervise and regulate the SCBs and the finance minister made that clear when he spoke to the press on this matter.
The autonomy of the Bangladesh Bank has been curtailed by instituting the Banking and Financial Institution Division (BFID) in the Ministry of Finance in 2009 through a cabinet decision. The major functions of BFID include, among others, formulation and updating of laws, rules and policies relating to banks, insurance and financial institutions, and development of the capital market. Unfortunately, one does not see any activities of BFID. The entity has rather been an obstacle in monitoring of the financial system by the Bangladesh Bank and other regulators.
The central bank regulates and supervises the local and foreign private banks. The performance of these banks has improved, as reflected in lower non-performing loans (NPL) and higher risk-weighted assets (capital adequacy ratio), and in meeting the global norms and best practices such as BASEL II. The SCBs have higher NPLs and lower regulatory capitals that risk their financial sustainability.
How to rescue the country’s financial system from these challenges? The financial sector is one of the important avenues to create rent, an essential element of political settlements, so politicians do not like to loosen their grip over it. However, excessive greed could undo many of the successes this sector has attained in the past few decades of reforms.
Donors and development partners are also to be partly blamed for the current state of poor regulation in the country’s financial system. Their prescribed wholesale liberalisation, without instituting an effective regulatory structure until the late 1990s, created room for misappropriation of funds in the past. While they have been largely effective in reversing the course in the post 2000s, particularly in private sector banks, by placing more focus on risk-based regulatory reform, they are apparently less than successful in disintegrating state from directly controlling finance.
Despite limited autonomy, the central bank governor should be credited for his efforts to arrest further degradation of the financial system. It is high time for the finance minister to act. The government must allow the respective regulatory bodies to regulate and supervise the concerned sectors independently. Successive governments have already given autonomy to the state banks, and more autonomy was granted to the Bangladesh Bank over the years. However, the creation of BFID has brought chaos and confusion into the system. This needs to be reversed. With its political muscle and 3% share, the government can temporarily deny the rights of 97% shareholders of the Grameen Bank, but it has already established a bad precedence in the financial system. The MRA should be the de facto authority to regulate the MFIs. Securities and Exchange Commission needs to be empowered to regulate the equity market.
Given the increasing regulatory failures in the system, it is time to contemplate if Bangladesh needs a regulatory body akin to the Financial Stability and Development Council of India to maintain financial stability, enhance inter-regulatory coordination, beef-up macro prudential supervision and coordinate the country’s international interface with financial sector.
Bangladesh’s financial sector, prior to the initiation of structural reforms in the 1990s, was a typical example of what economists call “financial repression.” The system that started performing better, particularly in the late 1990s and early 2000s thanks to a plethora of reforms, is apparently losing its direction. It does not need to be overregulated nor should it be left to the financial bandits to reverse the success of reforms. In their much celebrated book, Saving Capitalism from the Capitalists, noted economists Raghuram Rajan and Luigi Zingales observed that “a truly free and competitive market occupies a very delicate middle ground between the absence of the rules and the presence of suffocating rules.”
This post was originally published at The Daily Star and is reproduced here with permission.