My two cents on the proposed Banking Commission in Bangladesh

Illustration: TBS

The banking sector in Bangladesh is currently experiencing a critical state of financial distress, characterised by high levels of non-performing loans (NPLs), governance challenges, and structural weaknesses. Over the past few years, these issues have not only escalated but have also exposed systemic flaws within the country's financial institutions, necessitating urgent reforms and regulatory intervention.

The financial troubles in Bangladesh's banking sector have deepened significantly in recent years. Non-performing loans, a critical indicator of the sector's health, have reached alarming levels. 

As of 2024, the official figure for NPLs stands at Tk182,000 crore (around $1.7 billion), a sharp rise from Tk22,000 crore in 2009. However, experts believe the actual figure could be much higher, possibly exceeding Tk400,000 crore when considering rescheduled loans, loans in legal disputes, and write-offs. 

Several banks are also grappling with severe liquidity crises, leading to difficulties in meeting depositor demands. Long queues and withdrawal restrictions at certain banks indicate a lack of confidence among depositors, which is a troubling sign for the sector's stability.

The root causes of Bangladesh's banking crisis are multifaceted and stem primarily from weak governance, political interference, and corruption. Political appointments within the central bank and commercial banks have resulted in a culture of favouritism and nepotism, allowing influential businesses and individuals to secure large loans with minimal oversight. 

The Bangladesh Bank (BB) has faced criticism for providing liquidity support to nearly insolvent banks without proper collateral, which has only deepened the sector's troubles. Furthermore, loan scams have become increasingly common, with over Tk92,000 crore reportedly embezzled through 24 major scams since 2008. 

These incidents involve high-profile banks and businesses, revealing the extent of regulatory lapses. The textile, manufacturing, and real estate sectors are among the worst affected by these bad loans, which contribute to the overall economic instability of the country.

The situation worsened following the fall of the last government, which left a trail of financial mismanagement in its wake. The resignation of top officials at Bangladesh Bank, coupled with conflicts within several commercial banks, has added to the sector's fragility. Notably, ownership changes and management shake-ups at key institutions like Islami Bank have triggered widespread concerns about governance and regulatory oversight. 

One of the most pressing issues is the rising volume of classified loans. Despite attempts to conceal the full extent of the problem, it is evident that a large proportion of these loans are tied up in bad debts, many of which have been rescheduled multiple times without effective recovery mechanisms in place. 

The Export Development Fund (EDF), which provided foreign currency loans to influential businesses, is another area where significant financial losses have occurred. The broader economic implications of this crisis are substantial. 

The banking sector's instability has led to reduced investor confidence, slow private-sector investment, and declining export earnings. These factors, combined with rising commodity prices and a devaluing currency, are placing additional pressure on Bangladesh's economy.

The failures in Bangladesh's banking sector are primarily governance-related. Weak regulatory oversight, combined with politically influenced decision-making, has allowed financial crimes and unethical practices to flourish. The central bank's inability to enforce strict lending guidelines and ensure transparency in financial reporting has exacerbated the problem.

Against this backdrop, a Banking Commission is expected to be formed. This has been a long-standing demand from economists, bankers, and policy analysts to address the persistent issues in the country's banking sector and ensure its stability, transparency, and efficiency. 

The need for such a commission arises from various structural challenges that have been hampering the banking sector, including high levels of non-performing loans (NPLs), governance issues, and a lack of effective regulatory oversight.

While the Bangladesh Bank has faced challenges in enforcing compliance due to limited autonomy and external pressures, the commission, if formed, is expected to propose ways to strengthen regulatory frameworks and empower oversight bodies. 

The new commission should review the recommendations made by the Wahiduddin Mahmud-led commission formed in 1996 and identify an implementable set of actions without being overly ambitious. It must be noted that the commission will not be a substitute for Bangladesh Bank; rather, it will provide complementary support. 

Under the current interim government and the new governor, most of the desired activities of the commission may be fulfilled by Bangladesh Bank. However, short, medium, and long-term reform activities need to be identified to create a sustainable and efficient banking system. 

The commission is expected to provide guidelines for improving corporate governance, reducing political interference, and promoting accountability among bank management and boards. It is also necessary to consider whether a separate, independent banking supervisory agency should be established.

Exploring ways to increase the central bank's autonomy and authority in overseeing the banking sector is crucial. This includes revising regulatory powers to ensure stricter enforcement and supervision.

The expected commission should consist of financial experts, economists, former bankers, and legal professionals who bring diverse perspectives on the challenges facing the banking sector. A list of key tasks may include: (i) engaging with various stakeholders, including banks, regulatory bodies, business communities, and consumer rights groups, to gather input and develop a comprehensive reform agenda; (ii) conducting detailed research on best practices in banking reforms from other countries, tailoring them to Bangladesh's unique context; (iii) reviewing past reforms and analysing why they might have failed or succeeded; (iv) developing a roadmap with short-term, medium-term, and long-term actions, outlining step-by-step measures for addressing critical issues and tracking progress over time.

A more inclusive banking system, driven by digital innovations, will promote access to financial services for all, fostering economic growth. The Banking Commission in Bangladesh is expected to address deep-seated issues in the sector. By focussing on governance, regulation, financial stability, and inclusivity, the commission may build a more robust and resilient banking system. 

Monzur Hossain is a research director at the Bangladesh Institute of Development Studies (BIDS). He can be reached at monzur@bids.org.bd 

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.