Compliance in name, exclusion in practice: Rethinking bank governance

Commercial banking rests on a simple but often ignored principle: banks primarily operate with public money.

Banks' lending capacity does not come from shareholders' capital but from deposits mobilised from ordinary citizens. Small depositors, through their collective savings, form the backbone of the banking system.

Their trust, rather than financial sophistication or bargaining power, sustains liquidity, stability, and confidence.

Any serious discussion of compliance and governance in banking must therefore begin with how this public money is used and how those who provide it are treated.

In a well-governed banking system, depositors are not merely 'customers' in a transactional sense. They are core stakeholders whose interests deserve protection, transparency, and dignity.

Proper treatment of depositors includes the safety of their funds, timely access to their money, clear and honest disclosure of terms, effective grievance redress mechanisms, and respectful service regardless of deposit size.

These are not discretionary gestures of goodwill; they are essential components of regulatory compliance, fiduciary responsibility, and sound governance.

The reality in Bangladesh, however, often departs from this ideal. While banks frequently invoke the language of 'customer service', the lived experience of many small depositors reflects neglect and imbalance.

Long queues, procedural delays, opaque information, and indifferent treatment at branch level are common complaints. During periods of uncertainty, small depositors are the least informed and the most anxious.

Their money sustains the banking system, yet their concerns rarely influence institutional priorities or decision-making.

In stark contrast stands the treatment of large borrowers. They are routinely described as 'valued customers', a phrase that is revealing in itself. Dedicated relationship managers, expedited approvals, flexible terms, and access to senior management are standard features of their engagement with banks.

The implicit message is difficult to ignore: borrowers are valuable; depositors are ordinary. Large borrowers matter; small ones can wait. This distinction is not merely semantic. It reflects a deeper imbalance in how value is defined within banks.

The irony is obvious. Without the pooled savings of small depositors, the preferential treatment of large borrowers would not be possible. When banks equate value solely with borrowing size rather than contribution to systemic stability, they distort incentives and weaken accountability.

Regulatory compliance frameworks emphasise fair treatment of customers, conflict-of-interest management, and fiduciary duty towards depositors. Treating depositors as secondary stakeholders reduces compliance to a procedural formality rather than an institutional ethic.

The same governance weaknesses become even more visible in the treatment of vulnerable and small borrowers. Farmers, micro-entrepreneurs, small traders, and start-up businesses constitute the productive core of the real economy. They generate employment, support food security, and sustain local markets.

In principle, they deserve fair and favourable access to bank financing, particularly because the funds being lent originate from the public. In practice, these borrowers often encounter rigid collateral requirements, excessive documentation, higher effective costs, and limited institutional support.

Banks frequently justify this exclusion in the name of risk management. Yet risk is not eliminated by avoiding small borrowers; it is merely shifted and often magnified.

Concentrated lending to large borrowers, especially those with political or economic influence, creates systemic risk of a far greater magnitude. A sound compliance and governance framework recognises that inclusive lending, portfolio diversification, and prudent risk assessment are mutually reinforcing rather than contradictory.

Banks that genuinely respect compliance standards and governance principles demonstrate a different approach. In such institutions, depositor protection is embedded in strategic priorities rather than confined to compliance departments.

Clear internal policies establish minimum service standards for all depositors. Complaint-handling systems are functional and taken seriously. Transparency is practised consistently rather than selectively. Vulnerable borrowers are supported through tailored financial products, simplified procedures, risk-sharing mechanisms, and capacity-building initiatives.

These institutions understand that governance is not limited to preventing fraud or meeting regulatory ratios. It is fundamentally about aligning institutional behaviour with public trust.

Compliance, in this broader sense, extends beyond adherence to regulatory instructions. It reflects an ethical commitment to fairness, accountability, and long-term sustainability.

The responsibility for correcting existing imbalances does not rest with banks alone. Policymakers play a critical role in shaping incentives and setting priorities within the financial sector.

Policies must explicitly recognise depositor protection and financial inclusion as governance outcomes, not merely social or developmental objectives. Legal and regulatory frameworks should reinforce accountability for unfair treatment of depositors and exclusionary lending practices. Silence or ambiguity in policy often translates into institutional complacency.

Central banks, in particular, carry a clear and non-negotiable responsibility to safeguard depositors' interests. This responsibility extends well beyond monitoring capital adequacy and liquidity ratios.

It includes ensuring effective consumer protection frameworks, transparent disclosure of risks, fair treatment of depositors, and credible supervisory enforcement. Public confidence in the banking system depends as much on perceived fairness and integrity as on numerical indicators of stability.

The current level of financial exclusion among small and vulnerable borrowers in Bangladesh remains visible and concerning. Despite multiple initiatives, a large segment of farmers, micro-entrepreneurs, and informal businesses remains outside formal credit channels.

Many continue to rely on informal lenders at high cost, limiting growth potential and increasing economic vulnerability. This exclusion represents not only a development challenge but also a governance failure.

When public funds are intermediated in ways that systematically favour a narrow group while excluding productive but less powerful segments, the legitimacy of the financial system is weakened.

Such outcomes reflect shortcomings not only within banks but also among policymakers, regulators, and bank management. Governance failures are rarely isolated; they are systemic, reinforced by tolerance, inertia, and misaligned incentives.

Addressing these challenges requires more than regulatory amendments or additional circulars. It demands a cultural shift within the banking sector. Such a shift takes time, consistency, and leadership.

Yet it is troubling that, after decades of banking experience, fundamental issues such as respect for depositors, fairness in access to finance, and accountability in decision-making remain unresolved. These are not advanced concepts; they are basic principles.

Alongside policy reform and operational improvements, the country must invest heavily in financial literacy. Depositors and borrowers need a clear understanding of their rights, obligations, and risks.
Informed customers are better positioned to demand accountability and make responsible financial decisions. Digital literacy is equally important as banking services increasingly move online. Without it, technological progress risks creating new forms of exclusion rather than empowerment.

A broader and more balanced understanding of risk management is also essential. Risk should not be used as a blanket justification for exclusion but treated as a discipline to be managed through information, diversification, and institutional support.

Ultimately, governance outcomes depend on people. Placing competent, independent, and ethical professionals on boards and in senior management and regulatory institutions is not a slogan but a practical necessity.

When decisions are driven by short-term gains, external influence, or personal interest, compliance frameworks lose credibility and purpose.

How banks treat small depositors and vulnerable borrowers is therefore not a peripheral issue. It is one of the clearest indicators of their true commitment to compliance and governance.

A banking system that claims to serve the public interest must demonstrate that commitment consistently, not selectively. Until it does, discussions of financial stability and reform will remain incomplete, and the promise of inclusive and sustainable banking will remain unfulfilled.

Shah Md Ahsan Habib is a professor at the Bangladesh Institute of Bank Management (BIBM).

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.