Forced bank mergers: Just what the doctor ordered?
Merging two banks is not an easy thing; in fact, it is quite difficult. But if you do it the right way, with the right people, in the right process, it is a win-win for all parties involved
Bangladesh's banking watchdog, Bangladesh Bank, has recently been bestowed the authority to initiate forced mergers of any bank, if the board of directors and management are found to be involved in activities that go against the depositors' interests.
A bank merger is the consolidation of two or more banks into a single entity. It involves the combination of their assets, liabilities, and operations to form a new, larger institution, or to be absorbed into an existing bank.
Carefully executed forced mergers can revive Bangladeshi banks struggling with issues like capital crises, poor management and underperforming products. But bank mergers are not easy by any means, and things going wrong can mean disaster for customers, so due diligence must be followed every step of the way. If used properly, this tool can be a great help to both Bangladeshi banking industry and customers.
Bank mergers in Bangladesh
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Although not common, bank mergers are not an entirely new concept in Bangladesh either. In 2021, the troubled Padma Bank sought to merge with a state-owned bank, but was turned down by the Bangladesh Bank. Bangladesh's last successful merger dates back to 2009, when Bangladesh Shilpa Bank and the Bangladesh Shilpa Rin Sangstha merged to form Bangladesh Development Bank Limited.
But if we go a little further back to the year 2000, there was the high-profile merger of Standard Chartered and ANZ Grindlays Bank. The man who oversaw this transition, Mohammad A (Rumee) Ali, was the country head of ANZ Grindlays when the process started. After the merger, he took over as the CEO of Standard Chartered Bangladesh, before moving on to the Bangladesh Bank as the Deputy Governor.
He believes the move to empower the Bangladesh Bank to initiate forced mergers "is a good move, if things are done the right way."
Secret to a successful merger
The main hurdle is identifying the right banks to merge and ensuring the strong bank is indeed capable of going through with the process.
"If the good bank has the capacity to absorb the weaker bank, not just in terms of capital but management and expertise, as well as being financially sound, it can save the problem bank. It is a good thing if done correctly.
But it should be used very judiciously, not to favour anyone. There must be a guideline for which banks, under what circumstances, will be allowed to merge. The central bank must do its due diligence. The weak banks out there, which have no hope of recovering, can greatly benefit from this," explained Ali.
And when it comes to the actual process of merging, Ali believes communication and planning are key.
"When ANZ Grindlays Bangladesh was merged with Standard Chartered Bank in Bangladesh, I was the country head of ANZ Grindlays Bank, and I continued to head the combined bank.
We went through a communications exercise and learned how to go about it, both internally and externally. How to communicate with external stakeholders, what to say to the customers, how to communicate with the regulator—everything was planned," elaborated Ali.
The wins of bank mergers
The biggest and most obvious benefit of mergers is a larger pool of resources. This can mean offering more lending options to consumers, and investing in more projects.
"Weak banks are taken over by strong banks. If a bank wants to grow, there are two ways: either they can increase their capital and look for new customers, which is the longer route; or the shorter way is to take over another bank," said Ali.
Merged banks can also lead to the sharing of other resources, technology, and infrastructure, which can lower expenses and increase efficiency.
Merged banks can benefit from the expertise and talent of both institutions, which can enhance the quality of service and performance. For example, merged banks can access more skilled and experienced employees, managers, and leaders, which can improve customer satisfaction and loyalty.
Merged banks can complement each other's strengths and weaknesses, such as offering new products, services, or technology that one bank may lack. For example, merged banks can expand their product portfolio by offering insurance, mutual funds, or digital banking services, which can attract more customers and increase revenue.
Challenges and best practices
The biggest challenge in bank mergers might be the simple fact that the two banks will, in most cases, have very different organisational cultures, making the transition challenging.
Merging banks may have different values, goals, and practices, which can create conflicts and dissatisfaction among employees and customers. For example, the two banks may have different work cultures, such as hierarchical vs. flat, formal vs. informal, or collaborative vs. competitive, which can affect the morale and productivity of the staff.
According to Mohammad A (Rumee) Ali it is all about process.
"There will be cultural differences. It needs to be managed. Individuals move from one bank to another all the time, and they adapt. In my experience, I have seen employees have issues after moving to a new culture, but it is manageable.
You have to have communication with people; you organise programmes. The programmes we held after merging the two banks included the topic of how do we merge the two banks culturally also," explained Ali.
Merging banks can also face challenges in integrating their systems, processes, and staff, which can lead to errors, delays, and losses. For example, merging banks may encounter technical difficulties, such as incompatible software or hardware, data breaches, or system failures, which can disrupt the operations and services of the bank.
According to Ali, this is a simple matter of learning from others; "there are plenty of examples from all over the world on how to do it successfully; nothing new."
Losing customers who are unhappy with the changes in products, services, or locations or who prefer a smaller or more local bank, can be a concern; however, according to Ali, "If you know you are the customer of a bank that is not doing so well, but you are still their customer, you should be happy.
On the flip side, customers of the stronger bank might worry if their bank will be as strong after the merger. This needs to be managed carefully; the banks merging must be the right type. There should be clear communication with the customers and the public."
Merging banks may have different levels of compliance and risk management, which can expose them to regulatory scrutiny or penalties. For example, merging banks may have different standards or policies for anti-money laundering, consumer protection, capital adequacy, or corporate governance.
"It should not be done whimsically. It is a process, and processes have to be followed," said Ali.
There is the possibility that merging banks may create institutions that are so large and interconnected that their failure would pose a systemic risk to the financial system and the economy. But given the current makeup of the Bangladeshi economy and financial institutions, Ali does not see something like that happening anytime soon.
Mergers, although tricky, can be just what the doctor ordered for the saturated banking industry in Bangladesh. As Ali pointed out, "merging two banks is not an easy thing; in fact, it is quite difficult. But if you do it the right way, with the right people, in the right process, it is a win-win for all parties involved."
