Govt plans commission for sustainable reforms to banking sector

TBS Infographic

The interim government has announced plans to establish a banking commission – a call for which has been ignored for a long time – to reform a sector plagued by defaulted loans and poor governance. 

The new government will also formulate an action plan on the financial sector's overall situation and reforms it needs, according to a statement issued by the chief adviser's press wing today.

The action plan will be published within 100 days of the interim government's formation on 8 August, said the statement following a meeting between Chief Adviser Dr Muhammad Yunus and Bangladesh Bank Governor Ahsan H Mansur.

In the meeting, it also was decided to increase the existing band for inter-bank foreign exchange transactions from 1% to 2.5% as an initiative to increase liquidity in the foreign exchange market.

Under the current crawling peg system, the current dollar rate is Tk117 and may rise to Tk118. However, the new decision could raise the rate to Tk120. This is expected to quickly restore liquidity in the interbank foreign exchange market and increase trading volume.

The office of the chief adviser urged everyone to be patient to get the benefits of the measures taken to bring down inflation.

Economists and researchers have long demanded the formation of a banking commission to determine the overall situation of the banking sector as well as find the irregularities of the sector and bring sustainable development. 

In response, there were several attempts to form a banking commission before but all failed due to political reasons.

Fahmida Khatun, executive director of Center for Policy Dialogue, told TBS that the interim government should quickly establish the commission and start implementing its recommendations. 

"If effective, the post-election government might continue this work. The commission should be independent, with clear terms and objectives," she said. 

Zahid Hussain, former lead economist of the World Bank's Dhaka office, said there should be a strong, credible commission with government support.

"The finance ministry and the central bank should be responsible for implementing the commission's recommendations, and the government should publicly explain any decisions not to implement them," he said.

However, the economist said the reforms needed for the banking sector should be implemented within the next six months. "The commission should focus on recommending measures for a sustainable banking system in the medium and long term."

Weakening banks under AL rule

In the last 16 years under the Awami League government, nine commercial banks were licensed for political reasons. State-owned banks, including BASIC Bank, weakened due to major irregularities and fraud.

The government kept these banks afloat by injecting budget capital and amended the Bank Company Act to allow four family members to serve as directors for up to nine years.

While loan scams were once linked mainly to government banks, private banks have also collapsed due to fraud. Padma Bank, which failed because of a loan scam, remains unsustainable despite capital injections.

Islami Bank, once top-ranked, now borrows from Bangladesh Bank. S Alam Group, close to the government, owns eight private banks and has engaged in irregular borrowing. Allegations suggest Bangladesh Bank has supported such groups.

The previous government's 2% down payment offer for loan defaulters did not reduce defaulted loans. 

Attempts by former Finance Minister AHM Mustafa Kamal and former central bank governor Abdur Rauf Talukdar to address defaults with moratoriums also failed. Currently, defaulted loans total Tk1.86 lakh crore, with written-off and court-suspended loans bringing the total to around Tk5 lakh crore.

Failed promises for banking commission 

After the Awami League came to power in 2014, irregularities in banks increased, and state-owned banks began to rely on public funds. 

Economists have long called for a banking commission to investigate these issues. 

In 2017, Finance Minister Abul Mal Abdul Muhit announced plans to form a commission, but Yunusur Rahman, then secretary of the Financial Institutions Division, advised against it to avoid political fallout before the 2018 elections. 

Muhit withdrew the proposal.

After the 2018 elections, Finance Minister AHM Mustafa Kamal promised to form a banking commission, supported by Prime Minister Sheikh Hasina. 

Despite this, no commission was established. 

The current interim government's finance advisor, Salehuddin Ahmed, and newly appointed Bangladesh Bank Governor Ahsan H Mansur recommended forming a banking commission at different times.

Previous commissions

In 1982, under then president Ershad, a bank committee led by Brigadier A Qasem was formed to investigate banking sector issues. 

The committee's report revealed irregularities, and those implicated were later found to be funding Ershad's political party, raising doubts about the committee's intentions.

In 1984, a more effective banking commission, known as the "National Commission on Money, Banking and Credit"' was established as new private banks led to increased defaults. 

The commission's 1986 report was not implemented due to floods and political unrest.

After Ershad's government fell, the "Financial Sector Reforms Program" was launched in 1990 but did not resolve banking issues.

In 1996, the Awami League formed a new banking commission led by Wahiduddin Mahmud. The commission's report highlighted banking irregularities, but the Awami League, having been out of power for 21 years, attributed the issues to previous administrations and did not address them.