‘There is no need for businessmen to own or run the banks’

External interference, as well as unprofessional leadership in the country's financial institutions, seem detrimental to the growth of the banking sector. Even the top officials of the central bank have raised concern over the issue.

The Business Standard recently talked to economist Dr Saleh Uddin Ahmed, former Governor of Bangladesh Bank (BB) to get his perspective.     

A call for decoupling corporate entities from financial institutions was recently made by Bangladesh Bank Governor Fazle Kabir. Do you agree with this call?

In a sense, he is right. If the ownership of a bank and the corporate entity is separated, it will be better. Because a bank is not a company similar to one in the automobile or pharmaceutical industry. 

A bank is a special institution that holds the lion's share of depositors' money as its capital base. A bank does business with this capital. Here, corporate businessmen cum bank owners' contributions are not huge.

When a bank is owned by corporate entities, owners try to cash on the bank despite there being rules prohibiting the practice. But most of the time, the owners take loans from their own banks. And the deserving clients often are deprived of loans.

Another problem with such ownership is that there remains no level playing field because businesses owning a bank always have an upperhand. This has been the practice in Bangladesh. This is not really good.

In other countries, even in India, bank professionals or financial system experts, in general, own the banks. A few wealthy businesses own some financial institutions but their presence is minimal.

What I want to say is that banks are different entities as bank management has to follow some 'prudential norms' to decide who is eligible for the loan, who is not and how much money could be lent and what is the instalment period. Such decisions should only be taken by actual professionals.

Corporate businesses holding ownership of banks sometimes act as a pressure group. They try to influence the overall economy as businessmen. At the same time, they flaunt their power as bank owners as well. This practice by any means does not ensure a competitive business environment.

Wealth is concentrated among a few business people in Bangladesh. If the corporate businesses are decoupled from financial institutions, how do the banks create their capital base?    

There is no need for businessmen to own or run the banks. How much money is needed to launch a bank? Tk400 crore is enough as the capital base. Why not 400 persons deposit Tk 1 crore each and share the ownership of a bank. In many countries, small shareholders own banks.

Banking is not a sector like technology where companies like Grameenphone require Tk10,000-Tk15,000 crore of capital investment.

A bank is a knowledge-based company. Bank professionals will manage the financial system and get compensated for doing so. The bank staff will manage the system and the directors or representatives of owners will make policies, separately. There is no need for wealthy businessmen. 

On the contrary, what we see in Bangladesh is that directors influence the managing directors and the managing directors prefer to stay in the good books of the directors to enjoy undue privileges.

You talked about big investments. I don't think this is important. You can increase the core capital by floating a larger number of shares. As your earnings grow you can pay higher dividends.

By doing so, you can increase your capital base. You don't need to bring businesses into the bank management.     

There have been recent news reports about the interference of the Finance Ministry on the affairs of Bangladesh Bank. How important is the independence of the central bank while formulating monetary policy?

Of course. If BB does not enjoy freedom while formulating monetary policies which are very much professional as well as highly technical things, how can it do its job properly? 

If there is external interference by the politicians and bureaucrats, the central bank cannot implement monetary policies and monitor the banking sector properly.

In most countries, their central bank is a separate institution. However, there is no chance that a central bank can enjoy 100 per cent freedom. Politicians might influence it. Such influence does not mean that they give instructions on how to manage a bank. They could give suggestions.

The undue influences prevailing in Bangladesh, reduces the efficiency of the BB. External interference in a professional and highly technical field is not acceptable.

This is unexpected that a central bank is being directed by particular ministries or authorities.     

In the wake of growing imports there have been calls to devalue the Taka. To make the Taka more competitive, should our currency be devalued? 

Whether it is about the devaluation of local currency or fixing the rate of interest, the central bank makes decisions considering two types of factors: internal and external.

In terms of internal matters, the BB can make decisions by analysing the business dynamics of the country. But there are many external factors that are beyond BB's control. 

The external factors are changes in international trade or the Russia-Ukraine war that is affecting the currencies of other countries. The BB takes decisions upon balancing the two factors.

My suggestion is, when it comes to the devaluation of Taka, BB should leave it to the market. 

Imposing a 9 per cent or 6 per cent rate of interest is not expectable by any means. People are now showing little enthusiasm to save. By imposing a 9 per cent rate of interest, the banks have not gained much profit. 

This move has not benefited anybody. Businesspeople pay not only the rate of interest. There are other costs too like material cost, management cost, transport cost, fuel cost and others.

BB has devalued Taka. Some other countries including India, Sri Lanka and Pakistan have also devalued their currencies. 

Devaluation of currency helps the export sector become competitive when the currencies of competitors have been devalued. On the other hand, the devaluation of currency makes imports costly. There should be a balance. 

So, the devaluation of currency should be based on the market.  

Sometimes devaluation of currency is a necessity. But I would say that attention should be given to money being syphoned off through various means.    

The banks have been directed to invest in the stock market. What is your observation on this?

This kind of directive should not be given. I will not name any financial instruments in particular. But it seems to me this directive aims to stimulate a particular bond. That means, the directive was made to entertain vested interests. Banks should decide where the depositors' money will be invested. 

Such a directive has undermined the mandate of the central bank.  

A former senior banker suggested appointing a Board of Supervisors to oversee the Board of Directors in banks. What do you think?

I am not sure whether the senior banker suggested such an organogram for the central bank, or the other scheduled banks. 

But the central bank has such platforms: Board of Directors or Board of Governance and Managing Committee of the central bank.

What we have seen in Bangladesh is that some board members who are businessmen laundered money from their own banks and no one even knew about it. 

The best practice is for board members to monitor every large transaction made by the bank owners. There are several examples of this in Europe and Japan. 

Based on this spirit, I think, the senior banker recommended the two boards so that bank management can keep money laundering in check. Because once the money is laundered, it cannot be returned. There is no such example in Bangladesh.