The quest for discipline in Bangladesh's banking sector

Representational image. File Photo: TBS

The symphony of Bangladesh's economic growth and stability pulsates through the heart of its banking sector, a vital institution harmonising savers, investors and borrowers to orchestrate economic development. Yet, a lack of discipline in Bangladesh's banking sector in recent years has cast a shadow upon this symphony, demanding an urgent plea for order.

Discipline within the banking sector is not a mere nicety but an absolute necessity. It encompasses risk management, regulatory adherence, ethical conduct and transparency. The importance of restoring discipline in Bangladesh's banking sector cannot be overstated.

A disciplined banking sector is fundamental to economic stability. It safeguards against excessive risk-taking and ensures prudent financial management. 

Trust is the bedrock of banking. When investors and consumers have faith in the integrity of banks, they are more likely to engage in financial activities like saving and investing, which, in turn, fuels economic growth.

People's trust and confidence in the banking system have recently declined. Unprecedented classification, lack of transparency and accountability, fund embezzlement by some quarters of the society and mismanagement coupled with other issues have raised questions about the discipline of the Bangladeshi banking sector. 

Some foreign rating companies like Moody's downgraded Bangladeshi banks, risking their relationship with their foreign counterparts, which can affect the banks negatively in the future. Many foreign banks would be reluctant to continue the correspondent relationship, and LC opening and confirmation relationships would be in jeopardy.

The Bangladesh Bank, the country's central bank, and the government must give due attention to save the country's banking sector, as the downfall and lack of discipline will erode the economy in many uncertain ways. Bangladesh's banking sector faces a plethora of challenges regarding transparency and accountability, making reinforcement of discipline an urgent need for the country.

High levels of non-performing loans have weakened the financial health of banks. Deliberate defaults and a lack of stringent enforcement have exacerbated this problem. According to a report published in The Daily Star, the banking sector's total risky loans amounted to Tk 377,922 crore at the end of 2022. We need to work on zero classification and take multiple drastic legal proactive actions to catch intentional defaulters and punish them accordingly. 

Weak corporate governance practices have made banks susceptible to undue influence from influential shareholders or directors. This has resulted in mismanagement and conflicts of interest.

Political interference in banking decisions has been a long-standing issue in Bangladesh. It compromises the independence and effectiveness of banking institutions.

Inadequate risk management practices have contributed to the accumulation of bad loans and financial irregularities in the sector. Besides, scandals involving unethical behaviour, such as loan fraud, money laundering and embezzlement, have raised questions about the integrity of some banks.

There is a pressing need to restore discipline in the banking sector without hesitation and delay. Addressing the need for discipline in our banking sector requires a concerted effort involving multiple stakeholders. Here are some strategies and actions that can help restore discipline:

Strengthen regulatory oversight 

Regulatory bodies like the Bangladesh Bank must enhance their oversight and enforcement capabilities. Stringent monitoring and ensuring compliance with banking regulations, especially lending practices and risk management, are imperative.

Enhancing corporate governance 

Banks should adopt robust corporate governance practices. This includes ensuring transparency, accountability and independence. Independent boards of directors and rigorous risk assessment processes are crucial to enforce discipline.

Combat political interference

Measures should be taken to reduce political influence in the sector. A merit-based approach in appointing key personnel within banks can bolster independence.

Improved risk management 

Banks should prioritise developing and implementing comprehensive risk management frameworks. Effective assessment of credit, market and operational risks is essential.

Loan recovery mechanisms

Establishing specialised agencies or courts dedicated to handling loan recovery cases efficiently is another strategy the banking sector needs to adopt. It must also strengthen mechanisms for recovering non-performing loans.

Ethical training 

Banks must promote ethical behaviour through training and awareness programmes for employees. Clear codes of conduct should be established, and ethical standards should be enforced.

Transparency and accountability 

The banking sector must ensure transparency in financial reporting. It must also ensure that banks are held accountable for their actions.

Restoring discipline in Bangladesh's banking sector is pivotal for economic stability, investor trust and equitable resource allocation. To achieve this, concerted efforts from regulatory bodies, banks and the government are essential. With a renewed commitment to discipline, the banking sector can once again become a robust pillar of Bangladesh's economic growth and prosperity.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.