Sunday | 6 October 2024 | Reg No- 06
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Sunday | 6 October 2024 | Epaper
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Banking sector reforms and some proposals

Published : Sunday, 6 October, 2024 at 12:00 AM  Count : 122
DR A K M SHAHEED REZA
The possibility of a great change in the political administrative arena of Bangladesh has been created through the blood-shedding movement in the months of July and August of this year. An interim government is now running the country. 

This government is undertaking different initiatives to consolidate political democratic rights of the people, one of which is the banking sector reform. For this purpose, a taskforce has been formed with experienced and talented people.

The economy cannot be thought of without banks. The banking sector plays an important role in the economy. The role of banks has been expanded further in a free market economy.  A modern responsible banking structure can make a significant contribution to the development of the country, state, and people's livelihood. There are such examples in many countries of the world. But everything depends on how the bank management works.

Independent Bangladesh started its journey with a government-owned banking system.  At that time, the government might have thought of running the country with public ownership, and that is why state ownership was given priority. But the result was a series of catastrophes and crises, including the eventual weakening of for-profit institutions due to mismanagement and corruption, and labour unrest. Later on, after the change of government, the economy of Bangladesh started running towards the free market. Individuals are slowly being put up.

In 1983, the then government allowed the establishment of banks and financial institutions for the first time in the private sector. At present the number of private or privately-owned commercial banks is 42, of which 34 are conventional banks and the remaining 8 are Islamic Shariah-based banks. Out of this, there are about 35 non-banking financial institutions. 

Despite the increase in the number of institutions in the last 40 years, the private sector banks and financial institutions of Bangladesh have completely failed to achieve desired goals. People's deposits and aspirations have been ground to a halt. It has created a 'cartel' or 'oligarchy' in the country's economy. That is why news of mismanagement and looting in private banks and non-bank financial institutions appears in newspapers and mass media almost every day.

At present, in the changed political situation, an opportunity has been created to examine why this has happened. We need to see what were the legal aspects that caused intentional damage to the country's economic management, development, and people's savings; only a few people looted these away. 

We mainly want to discuss two main driving forces in the country's banking sector. These are the current working conditions of directors and management of private banks and non-bank institutions in Bangladesh, and some proposals to achieve the desired goals by ensuring good governance in financial businesses. 

The most important thing to look at is the composition of the bank's Board of Directors and its role. All entrepreneurs should be evaluated as investors by changing the position of sponsor/promoter after listing in the stock market. As the bank runs mainly on public deposits, it is a public enterprise or people's institution. 

It needs to bring cultural and legal changes to the concept of being bank owners. The bank director's position/designation is respectable, but it should not be greed-induced. As 'officers of the public', members of the Board of Directors will play the role of quasi-regulators. They will act in the interest of clients, depositors, shareholders, and stakeholders, according to the government rules and instructions of the central bank; and they will also make policy in the light of good governance and supervise its implementation. The Board of Directors will not approve any loan proposal or engage in it.

This provision should be made by amending the existing Banking Company Act. The special committee titled Board Executive Committee should be abolished. The directors or board members will perform the duties of the risk management committee and audit committee.

The Board of Directors shall meet once a month. The remuneration of directors participating in the meeting will be determined by each institution based on the financial health of the bank with the approval of the central bank. 

The involvement of a director or board in loan investment, recruitment and promotion, and day-to-day organization management is a major cause of the destruction of banking institutions. A lack of banking knowledge and a cartel culture have led to loan approvals that can be considered looting.

At present, a maximum of 21 directors can be elected to the Board of Directors of the bank. Of this, the number of impartial or independent directors is 20 per cent of the board members. The remaining 80 per cent are entrepreneur directors. 
Next to this large entrepreneurial group of directors, the impartial or independent directors remain inactive like a tail. The bank management authorities also do not give much importance to them. As a result, in bank management or in establishing good governance, the independent directors cannot make any value addition. They just do people-showing or rule-keeping trips and feel blessed if they can help one or two acquaintances get a job or a loan. This is the position of most bank and non-bank independent directors. 

To ensure good governance through the duties and responsibilities of independent directors, their percentage should be half of the total number of working directors. Among them, there should be the presence of women, religious minorities, or small ethnic groups. But for all of them, merit and experience should be counted as criteria for appointment to the position of director.

Sponsor or entrepreneur directors are appointed on the basis of two per cent or more of the current paid-up capital with minimum education and experience and some other qualifications. As a result, talented officials cannot come to the Board of Directors. Due to the provision of holding such a large number of shares, an 'oligarchy system' has been created. Before the change in the present Banking Company Act, this number was only holding shares worth Tk 10,000. Taking advantage of the latest amendment to the Banking Company Act, the same person or family can continue to be elected as directors, most of whom are semi-educated backward-thinking people. This provision of two per cent shareholding is one of the reasons for the destruction of the banking sector in Bangladesh. To get out of this situation, talent and experience should be considered in the selection of entrepreneur/investor directors. They must have Master's degree in banking-related subjects, such as Management, Economics, and Accounting.  The age limit for getting elected to the position of director should be fixed, which can be between 45 and 65 years. Application of modern new thinking and talent should also be encouraged in constituting the Board of Directors.

The minimum two per cent shareholding law was intended by the previous government to boost the stock market, but what has been the result? Shares of many banks are now trading below their declared value. A monopoly or dictatorship cartel has been created in the banking sector by the misuse of the amended Banking Company Act. 

*    Despite increase in the number of institutions in last 40 years, the private sector banks and financial institutions of Bangladesh completely failed to achieve desired goals.
*    At present, in the changed political situation, an opportunity has been created to examine the legal aspects that caused intentional damage to country's economic management.
*    It needs to bring cultural and legal changes to the concept of being owners.
*    The Board of Directors will not approve any loan proposal or engage in it.
*    Approval of loan investment shall be the sole responsibility of the management authority.
*    The special committee titled Board Executive Committee should be abolished.
*    To ensure good governance the percentage of independent directors should be half of the total number of working directors.
*    Talent and experience should be considered in the selection of entrepreneur/investor directors.
*    A directorship should have a term of office. It is not appropriate to have the opportunity to hold directorship for life on until the Day of Resurrection.
*    The banking system of the future needs to be created with professional bankers.

By repealing the two per cent paid-up capital provision, a new provision can be adopted like holding a share of Tk 50 lakh for at least one year. The present minimum share-holding and black laws creating monopolies should be abolished to include educated and talented people in the management of banking institutions.  This is because the investment money of an entrepreneur director is at best 2-3 per cent of the total bank's deposit. But they pretend they are the owners of the bank. 
A directorship should have a term of office or position. It is not appropriate to have the opportunity to hold a position for life or until the Day of Resurrection. 

Banks or financial institutions today are ultimately people's institutions. So there needs to be a change of people and thoughts on a regular basis. No one shall be a director for more than two terms under any circumstances. Such provisions are essential for ensuring good governance.

Since the beginning of the journey of private banks in Bangladesh, this institution has become an aristocracy for job-seekers. Fairly talented youths join the private banks with interest and dream of a comfortable life. In the personal corruption index, private bank officials are in a better position than other institutions in the country. 

The banking system of the future needs to be created with professional bankers. Approval of loan investment shall be the sole responsibility of the management authority. However, at the board meeting, they will present an information memo on this matter and tell the board what kind of banking business they are doing.

To approve loan investments and manage day-to-day operations, the managing director will form a committee consisting of top executives with the approval of the Board of Directors and perform effective roles and responsibilities through regular meetings. This committee can rather be called as Executive Committee. There shall be no committee in the name or nature of the Board of Directors or Board Executive Committee. If a large amount of loan is sanctioned, the details of the loan should be published on the bank's website.

For smooth and timely conduct of bank business, sometimes withdrawal of money from a suspended account might be required. However, it must be approved in advance by the Supreme Executive Committee headed by the managing director. In this case, many stories are heard from different banks. It is very necessary to ensure transparency and accountability in these areas for good governance.

Promotion is very important for a professional. The owner-employee relationship in our private banks has grown deep in the last 40 years. Almost every officer plays a slave role to his owner for promotion. The higher he rises, the more he enters into the relation of slave and master for little personal gain. Without changing this culture, the banking industry will not be able to turn around in any way.

In the light of central bank's guidelines for the promotion of employees, initiatives should be taken to give regular promotions without lobbying by following appropriate and timely Key Points Indicators (KPI). The Board of Directors should not take any role in the promotion of officers.

A significant portion of Bangladesh's banks and non-bank financial institutions are in shambles today. But if good governance principles are implemented in this sector of the economy having half of the energetic and brilliant youth manpower, the sector will definitely turn around. 

The writer is a senior banker, an industrialist and entrepreneur investor in different organizations in the financial sector



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