What CPD Executive Director Fahmida says about merger of five banks

Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD) and a member of the board of directors of Bangladesh Bank, has weighed in on the government's plan to merge five struggling Islamic banks – First Security Islami Bank, Global Islami Bank, Union Bank, Social Islami Bank and EXIM Bank. 

Talking with The Business Standard, Fahmida warns that while the move aims to prevent a systemic collapse, it risks rewarding corruption unless accompanied by strict accountability and deep reforms at the central bank.

Why rescue corrupt banks with taxpayer money?

The primary objective behind this decision is to prevent the systemic collapse of weak and failing banks. The sudden closure of these banks could spread panic and shock among depositors, businesses and employees. Of course, there is a moral hazard: taxpayers' money will be used to manage the mess created by corrupt and politically connected loan defaulters. This is why the government must ensure strict accountability for the performance of banks receiving bailout support.

Who ensures political/business interests do not capture the new board?

A strong and independent Bangladesh Bank should ensure that bank boards are not captured by politically linked business groups and individuals, as was the case before. The proposed merger framework cannot succeed without independent, professionally qualified directors. Since the central bank was previously captured by politics and business, it acted as a silent observer while loans were sanctioned and rescheduled, breaking the norms.

Is revival possible without correcting Bangladesh Bank?

Reviving banks without reforming the governance and capacity of Bangladesh Bank is impossible. The reform measures proposed by Bangladesh Bank to improve the health of the banking sector can only succeed if there is a strong central bank. Revival is impossible unless the regulator itself is freed from political interference.

Can the government really afford Tk20,000 crore in a tight fiscal situation?

Bangladesh's current fiscal space is extremely narrow. In the last fiscal year, the tax-GDP ratio was only 7.4%. Such low revenue mobilisation is inadequate to finance the country's development priorities, such as health, education, social safety nets and climate adaptation. 

Allocating Tk20,000 crore to bank bailouts means the government will have to recalibrate its allocations. It must ensure that these critical sectors are not deprived. Moreover, the government must assure citizens that this injection of money into weak banks will be a one-off recapitalisation. 

In the past, recapitalisations were repeated without results. The government must therefore consider the opportunity cost: the country is forgoing social infrastructure and other necessities to clean up banks that were looted with impunity. Without accountability, recapitalisation of weak banks will only reward corruption and repeat the cycle of mismanagement.