Tackling the deep-rooted flaws in Bangladesh's banking industry

Infographics: TBS

Bangladesh's banking sector is currently grappling with a crisis, one that has been exacerbated by deep-rooted systemic flaws. The situation can best be described as a contagion, with the effects of mismanagement and corruption spreading across the industry, threatening to destabilise the entire system. The damage, much of which can be traced back to compromised governance, has resulted in systemic risks that are now becoming evident at all levels of the sector.

At the heart of this crisis lies the failure of the banking system's structural elements. These elements, which include crucial components such as credit risk management, once provided the safeguards that kept the sector stable. However, the weakening of these core structures has led to what experts now call a 'systemic risk'. If unchecked, this risk has the potential to destabilise the entire banking ecosystem. Banks that flouted governance practices and were already financially weak have borne the brunt of this crisis. For these institutions, the consequences have been severe, both financially and structurally, and it will take considerable time and effort to heal the wounds inflicted.

One of the most glaring issues contributing to the sector's fragility is the overwhelming number of non-performing loans (NPLs). These loans persist because of a fundamental breakdown in the system's three core components: Policy, People, and Process. Policy, the fundamental statement of intent that should govern actions such as loan approval and deposit acceptance, has been compromised. Risk management policies, which should guide these actions, have been ignored. 

Furthermore, the people responsible for managing these policies—bank leadership and staff—have often lacked the necessary training and the processes that should ensure risk mitigation have been left weak or ineffective.

The governance failures have been further compounded by corruption, nepotism, and political favouritism, which have played a key role in undermining the system. These issues are not merely symptoms of a broken system; they are the very cause of the system's fragility. When governance structures fail, institutions begin to collapse under the weight of mismanagement and abuse. 

Banks that were granted licences based on political influence, rather than sound financial principles, have contributed to the erosion of the sector's stability. Loans were often approved not based on merit but as a result of political connections, and key decisions, including those related to human resources and procurement, were made without regard to governance best practices.

The Bangladesh Bank (BB), the central regulatory authority, has faced significant criticism for its role in allowing politically connected businesses to benefit from preferential loans. To regain credibility and restore integrity to the sector, BB must take decisive and transparent action. This includes addressing the leadership failures in the banks, removing those complicit in mismanagement, and implementing a strong regulatory framework that holds all institutions accountable. 

While the central bank may have the regulatory power to enforce change, its actions to date have often lacked the necessary impact. The actions taken must not only correct the immediate problems but also send a clear message to other banks, discouraging them from following the same path.

Reforming the banking sector in Bangladesh is a monumental task, but it is not an impossible one. Under the interim government, led by Professor Muhammad Yunus, there is hope that reforms will be introduced to tackle the deep-rooted issues in the sector. However, this will require a comprehensive understanding of the damage done over the past decade, as well as a clear strategy for recovery. 

While governance failures have been highlighted as a primary cause, it is important to recognise that these failures were part of a larger, deliberate strategy to plunder the industry. From collusion with government agencies to massive financial manipulations, this 'assault' on the banking system has been nothing short of a heist, and it will require a thorough investigation to unravel the full extent of the damage.

For reform to be successful, the government must address the underlying causes of the crisis, rather than simply treating the symptoms. This will involve strengthening the legal and regulatory frameworks, improving the capacity of the human resources in the sector, and ensuring that reforms are sustainable. 

Political will is crucial in this process, as any government would need to make tough, often unpopular, choices. This may involve risking short-term political popularity for long-term stability, but there is no alternative if Bangladesh is to restore credibility to its banking sector.

The examples of countries like South Korea, which faced similar oligarchic control over their banking sectors, offer valuable lessons. Through competition, regulatory reforms, and market democratisation, South Korea was able to break the hold of oligarchies and promote a more transparent and robust financial system. Similarly, Japan's post-World War II banking reforms demonstrate how effective governance and market oversight can transform a nation's financial sector. Bangladesh can take inspiration from these models, but it must act decisively and with integrity to achieve lasting reform.

The task ahead is undoubtedly daunting. However, with sustained commitment, a clear vision, and an unwavering focus on transparency and accountability, Bangladesh can turn its banking sector around. The real challenge, as always, will be ensuring that these reforms are not just implemented but sustained over time. This will require significant financial investment, political will, and cooperation from all stakeholders in the industry. Only by learning from past mistakes and committing to a future built on integrity can Bangladesh hope to rebuild its banking system and restore faith in its financial institutions.

TBS Deputy Editor Sajjadur Rahman interviewed Rumee Ali over the phone