In Bangladesh's banking sector, dual governance system has been observed for many years. Across the world, central banks act as the sole regulatory authority for banking sector. But Bangladesh is an exception that two regulatory bodies i.e Financial Institutions Division (FID) under the Ministry of Finance & Bangladesh Bank both control the banking sector. Unfortunately, over the past 15 years, Bangladesh Bank has often functioned more like a sub-office of FID rather than an independent/autonomous central bank. It has failed to operate with full autonomy. Due to this dual governance, many important functions of Bangladesh Bank have been rendered powerless, much like the Nawabs under British rule.
The establishment of FID in 2010 introduced dual regulation of banking sector by Bangladesh Bank and FID. At one time, Financial Institutions Division was known as Banking Division. Toward end of BNP government in 1994, Banking Division was established under Ministry of Finance for the first time. In 1998, two years after the Awami League regime in 1996, Banking Division was abolished. After over a decade, the Awami League government reintroduced the division. On January 6, 2010, the Ministry of Finance formed a new division named "Bank and Financial Institutions Division." Just a month later, on February 11, 2010, a World Bank delegation met with officials at Secretariat and expressed concerns that establishment of this division might undermine the authority of Central bank. Observing that presence of dual regulators exacerbated governance failures instead of strengthening oversight mechanisms.
This is because mandate of the FID clearly states that its primary function is to ensure proper administration and interpretation of Bangladesh Bank Order, 1974. Besides, orders relating to specialized banks, state-owned banks, insurance and financial institutions all fall under the purview of the FID as well. FID's mandate directly contradicts Bangladesh Bank Order, which states the main function of the central bank is to regulate and supervise banking companies and financial institutions. So, it seems a regulator was formed to oversee another regulator. Following establishment of FID, banking sector governance significantly deteriorated.
However, allegations have been raised that the Financial Institutions Division (FID) interferes with the functions of Bangladesh Bank. It is said that most unethical lobbying and undue influence originate from this division. Irregularities in banking sector are often driven from here. Bangladesh Bank has very limited control over state-owned banks. Unlike private banks, where Bangladesh Bank can enforce laws effectively, it cannot do so in case of state-owned banks. In particular, Bangladesh Bank has little to no role in the appointment and removal of managing directors and other board of directors of state-owned banks.
Promotions, transfer & posting of executive of state-owned banks is determined by the FID although it should have been under the authority of Bangladesh Bank. It is from this division that recommendations are made to appoint political leaders and controversial figures to the boards of directors of state-owned banks. Over the past 15 years, leaders from Awami League, Jubo League, Chhatra League, Swechchhasebak League, and even the Jatiya Party were appointed as directors of state-owned banks, turning the sector into a haven for plundering. Decisions from FID during this time were marked by corruption, nepotism, and political considerations. The FID is often seen as the architect behind destructive political decisions in the banking sector-such as the case of BASIC Bank's chairman Sheikh Abdul Hye Bacchu. Actually Political governments more or less exert pressure on FID at times to take popular decisions for reasons of political expediency. One of the most serious problems is that Bangladesh Bank is often unable to directly intervene in many of irregularities and corruption, particularly those concerning boards of directors at state-owned banks. Instead, it is left to passively observe these issues-an unacceptable situation for any regulator.
In 2023, prominent economist and Finance Adviser of present interim government Dr. Salehuddin Ahmed expressed in a newspaper interview that the biggest problem in banking sector is lack of internal good governance. He said a kind of dual governance exists in the banking sector. Bangladesh Bank can exercise some control over private banks, but not over state-owned banks. In case of state-owned banks, Banking Division under the Ministry of Finance holds the reins. This duality creates management issues. According to him, whether a bank is public or private, it should be regulated by a single authority. He further remarked that current system of running the banking sector is essentially dual governance, which is never beneficial for any sector. A sensitive sector like banking must be under a single control structure. If not, complications and issues are inevitable. He cited examples where Bangladesh Bank objected to certain issues, but those objections were overruled by the Banking Division. For example, when nine new private banks were approved, Bangladesh Bank raised objections, but Ministry of Finance proceeded with the approvals. He emphasized that all banking and financial institutions should be regulated in light of socioeconomic context of the country.
During the Awami League's regime, policies were introduced allowing three members of same family to be appointed as directors of a private bank, with their tenure 12 years-a policy still in place. This has institutionalized dynastic control in private banks. Under state patronage, this has contributed to a mountain of defaulted loans, large-scale embezzlement, money laundering, appointment of unqualified and corrupt Governors, and direct interference that has effectively paralyzed the central bank-all with the FID playing a significant role.
An oligarch class has emerged in the banking sector through the FID. The ousted Awami League government in its 15.5 years of autocratic rule established a looting model in the Banking sector. Banking sector of the country has been ruthlessly plundered by the same group of 'oligarchs' who have grown like parasites with the regime. According to the Centre for Policy Dialogue (CPD), Financial Institutions Division poses a threat to the autonomy of Central bank. Not only Dr. Salehuddin Ahmed and Dr. Ahsan H. Mansur (Governor of Bangladesh Bank), but also other prominent economic & banking experts have frequently criticized the FID in public statements.
To strengthen contribution of banking sector to economic development, comprehensive structural reforms are necessary. So far, significant reforms have been stalled due to a lack of political will. After a long wait, the current interim government has begun banking sector reforms. Furthermore, the sector is now being led by some of the most honest, competent, and experienced economists in the country. The public has high expectations that these leaders will be able to restore lasting discipline and governance to the banking sector through required reforms.
We hope that central bank will be built into a powerful institution, free from political interference. Experts also opine that in order to establish full control and good governance in the entire banking sector, Bangladesh Bank should be transformed into a strong institution with full autonomy. To ensure good governance and empower central bank, Financial Institutions Division (FID) should be permanently abolished to eliminate the scope for dual governance system in the banking sector of the country.
The writer is a banking and economics analyst
