Bank-driven long-term financing model not sustainable: Governor

The current long-term financing model is not sustainable as banks are mostly funding with their short-term deposits, creating a mismatch in assets and liabilities that leads to high default loans, said Bangladesh Bank Governor Abdur Rouf Talukder at a discussion in Dhaka on Sunday.

"I have been pursuing for a long time the long-term financing model where banks will provide guarantees, which will be their non-funded liabilities," he said at a session titled "Developing Long-Term Finance Markets to Support New Growth Opportunities" on the second day of the three-day Bangladesh Business Summit 2023.

"Now time has come to change the model, and the Bangladesh Securities and Exchange Commission (BSEC) should come forward to play a role," he added.

The governor suggested a model where financial institutions can provide guarantees for long-term financing when companies should raise the funds from the capital market.

He said the BSEC should focus more on policy formulation for capital market development instead of day-to-day issues.

Abdur Rouf Talukder said 99% of long-term financing comes from banks with short-term deposits, which contribute to high default loans in the banking sector.

The Bangladesh Bank is also arranging long-term financing by introducing a refinancing scheme for the private sector, he added.

The governor said the central bank is now following the policy of reducing aggregate demand and financing to ensure smooth supply to reduce price pressure.

"We are also working to eliminate multiple exchange rates, and you will see a market-based exchange rate very soon," he added.

Ali Reza Iftekhar, managing director of Eastern Bank, said the default loan is now a cancer for the banking sector and it should be addressed in the shortest possible time, otherwise "banks will die".

He said a lack of good governance on the board is the main reason for high default loans, and banks are losing money because of this, which is creating a liquidity problem.

"We should not hide default loans under the carpet; otherwise, they can never be managed," he said.

"We have to accept that the default loan is there and then go for corrective measures," he said, adding, "We need more independent directors, and they have to be really independent, not cousins or friends." 

Mahbubur Rahman, chief executive officer at HSBC Bangladesh, said foreign investors look for the counter party's ability to pay back money and where the money is going.

"Foreign funds are available there; we need governance and transparency in auditing financial reports of companies to build trust among foreign investors," he further said.

Khalid Quadir, founding managing partner of Brummer and Partners (Bangladesh) Limited, said Bangladesh can be the mini-China because it can attract foreign investors due to its cheap labour.

He said the size of the global private capital market is $8 trillion, of which 20% is allocated to emerging countries.

Bangladesh is still not focusing on the private capital market and is running after traditional funding from multilateral donors like the World Bank and the International Monetary Fund (IMF).

"We need to come out of the tendency of running after government funds and look for private capital by bringing some reformation to our policies to attract foreign investors," Khalid Quadir said.

In a presentation on the economic scenario of Bangladesh, Arif Khan, vice chairman of Shanta Asset Management, said at the session that the country needs an average of $25 billion in investment every year to become a developed nation, but there is a deficit of $5 billion to $10 billion.

The banking sector is now in trouble with high-default loans above 8%, and if rescheduled loans are considered, the rate will be much higher, he further said.

In this situation, the capital market can be the solution for raising funds, Arif Khan said. 

He said fund-raising from the capital market is still very low. It is because of compliance-related challenges, an unwillingness to go public due to transparency and accountability, easy access to bank finance, and a lengthy timeline for listing about 6-7 months.

He said foreign investors are not willing to come because they want a predictable policy for at least five years about remitting money, stable exchange rate and interest rate.

Atiur Rahman, former governor of the Bangladesh Bank, moderated the session where Shaikh Shamsuddin Ahmed, commissioner of the BSEC, Alamgir Morshed, executive director and CEO of Infrastructure Development Company Limited (IDCOL), Asif Ibrahim, chairman of the Chittagong Stock Exchange, Yahya Al-Harthi, director of the Saudi EXIM Bank, and DJ Pandian, director general of the New Development Bank, also spoke.