This is part of a series that offers a retrospective look at Bangladesh’s financial sector
In the previous article on the governance of the banking system, the main structure of the functioning of the bank was exposed.
Properly implemented, this would provide an effective basis for governance.
However, the reality of the poor management of the recognition of non-performing loans and the easy tolerance allowed by the Bangladesh Bank leaves the banking system in a rather difficult situation.
In this article, we examine the ownership issue of commercial banks and the implications for their governance.
We focus here on private banks.
The governance of state banks is largely political.
A few words about state banks are interesting. (We are discussing commercial banks, not specialty banks.)
When Bangladesh was established as a nation, commercial banks were largely private.
There was no alternative to nationalizing the six commercial banks.
Also Read – A Retrospective Look at Bangladesh’s Financial Sector
Also Read – A Retrospective Look at Bangladesh’s Financial Sector: Part 2
Also Read – A Retrospective Look at Bangladesh’s Financial Sector: Part 3
Read also – Analysis: Interest rates and deposits
Read also – The state of lending rates – Part 1
Read also – Analysis: The state of lending rates – Part 2
Read also – Ever higher NPLs and bankers’ dilemma
Read also – The dilemma of NPL management
Also Read – A Retrospective Look at Exchange Rate Management in Bangladesh
Also Read – Summarizing Four Relevant Problems
Read also – Governance in the banking system
Much of the property was in the hands of people from West Pakistan.
What to do with these banks has been a topic of discussion ever since.
Of the six, two (Uttara and Pubali) were privatized in the 1980s without, however, cleaning up the portfolio which contained many bad debts.
The government intended to work on the privatization of three of the other four, keeping only Sonali Bank.
Rupali Bank was transformed into a public limited company and the shares were sold to the public although the government maintained a controlling stake.
Efforts were made to complete the privatization of Rupali Bank, but this effort failed due to confusion and questionable bidding practices.
Two additional banks became state commercial banks. (The specialized industrial bank and the basic bank created from the bankruptcy of a foreign bank).
The World Bank and the IMF pushed for the privatization of some of these six banks, but there was never a deal to do so and privatization is unlikely to be achieved in the next decade.
The 2021-2041 Perspective Plan does not cover the development of the banking system.
Set some rules
For these six state banks, there are few rules: bad debts constitute a large part of the portfolio, banks are insolvent if their true bad debt is recognized.
We cannot expect Bangladesh Bank to oversee these six banks.
Effective governance must focus on private banks.
In this article, we focus on private bank boards and how the functioning of boards can be improved.
The first point is training, explaining how a commercial bank works.
Most directors do not have the technical knowledge to do their job; it is imperative that they have an overview of how the bank works and the role the board should play.
Too often, directors focus on the following questions:
1. Get individual loans approved.
2. Have certain people appointed to the bank.
3. Orient major purchases in a particular direction
The real key tasks of a director are too often of concern to the board.
The main tasks of the board of directors are to formulate the bank’s strategic plan: on which sectors should the bank focus its lending? What new savings and deposit instruments should you try? What efforts should be made to collect major unpaid debts? What are the three-year projections for the bank’s financial condition and capital adequacy? What dangers does Bangladesh’s economy face and what should the bank do to protect itself?
Directors are expected to complete a series of training programs to study issues, think through issues, and master central bank regulations.
These could be implemented by external experts who would prepare and present the documents.
The owners of the bank are represented by the trustees and it is imperative that the trustees learn to work directly on key issues, even if there is no agreement.
The director’s task is to build an institution that will survive indefinitely and provide a reasonable financial return.
Directors should not swap loans with other banks to provide their own funding. They must continually pass the test of not having any delinquent loans.
The Bangladesh Bank can regulate the exchange of loans by requiring a monthly report from each director of all loans they have or from the companies they are directors (including their families).
The central bank can easily monitor this group of loans among administrators and identify loan swaps.
Improving the banking system is not a matter of regulations issued by the Bangladesh Bank with moderate compliance.
Success will depend on the progressive improvement of the behavior and actions of the boards.
This improvement should be led by Bangladesh Bank.
A major training program for directors should be mandatory with adequate participation and performance.
Loan approval should be left to bank staff, except for very large or particularly risky loans.
Staff selection should be the task of the human resources department other than the first 3-4 members of staff.
Procurement should be left to bank staff apart from large construction works or large scale IT systems.
An audit committee of the board should operate independently to ensure that an appropriate audit is performed.
A regulatory committee should review and improve banking procedures using external consultants for advice and review.
The tasks of the banking system are clear: shift the functions of the board to questions of strategy and planning; large-scale regulatory reviews and changes; audits to ensure the integrity of the bank’s financial reports; selection of the senior management of the bank.
Directors should not be involved in purchasing, loan approval or personal matters.
The manager should not see the bank as a personal automatic teller machine but as an institution towards which he has the responsibility to develop its strength and its functioning.
Bank ownership
There is a lot of talk about the ownership of banks in Bangladesh.
There are rules that define the amount of shares that can be held by a family and the length of time a director can remain in office.
Then comes the problem of direct government interference in the board of directors of a bank.
Finally, there is the problem of being a director of more than one bank.
The involvement of a bank manager should be less regulated.
The issues are not the continuity of ownership but the diversity of the Council.
The Bangladesh Bank should review the Board’s diversity every two years and determine whether it meets the required diversity concept.
The Bangladesh Bank should report its formal findings to the Bank Board and request the appropriate corrections.
Diversity should not be defined in absolute terms but in a relative way.
A president can normally be expected to serve for four years, but may be asked to leave earlier or continue for an additional two years. There should be no age limit as long as the director is in good physical and mental health.
If the Bangladesh Bank has issues with a board of directors, it should inform the board of directors and owners of the bank and suggest corrective measures.
It is reasonable to require that a family have only one bank manager.
The problem is that in many cases a director is a straw man for someone who is a director of another bank.
Bangladesh should investigate these cases and take appropriate action.
These latest comments argue in favor of central bank flexibility rather than rigid rules.
In summary, bank boards must reorient their activity towards reviewing the strategic direction and performance of the bank.
Bangladesh Bank should not try to apply rigid rules, but monitor the actual performance of a bank and guide boards appropriately.
Forrest Cookson is an economist who was the first chairman of AmCham and was a consultant for the Bangladesh Bureau of Statistics
