Khondkar Ibrahim Khaled
Bank
failure is not uncommon. We witnessed bank crises in the United States as well
as in Europe. During first decade of present century, US economy underwent
serious turbulence. Banks and Financial Institutions faced deep crisis. Some of
the century old reputed banks and financial institutions were on the verge of
collapse. Market economy preaches the principle of ‘survival of the fittest’
which means weak institutions should go out of market. But US government
ignored this principle and came forward to rescue the collapsing financial institutions.
In the midst of hot debates, the US law makers passed bills providing billions of
dollars for rejuvenating the ailing banks. Principles of market economy were
sacrificed to save the banks. Tax-payers money was drained to rescue privately
owned institutions. There were two different assumptions behind such unethical
action. It was argued that millions of customers will suffer huge amount of
loss, if banks were allowed to collapse. Hence, the government came forward to
safeguard the interest of customers who were common people. It was viewed as
protecting citizens’ rights. On the other hand, a different perception was
observed. Critics suggested that the financial institutions were owned by top
class rich people who exercised unavoidable influence on the government. It was
suggested that 500 rich families run the US government form behind the scene,
To safeguard this interest of owners belonging to this group, government had to
come up with rescue package. Probably both the assumptions are valid, as the
rescue package saved the owners as well as customers.
Bangladesh
did not witness large scale bank failure scenario. However, one or two cases
may be examined to understand problem solving measures and perceptions relating
to those cases.
The
only bank failure incident relates to local branch of a foreign bank, closed
down in London by the central bank of UK. Bank of Credit Commerce &
Industries Ltd (BCCI), a Pakistani owned foreign bank, was closed down by the Bank
of England for unethical banking. Hence its Dhaka branch became inoperative.
During formative years of banking in independent Bangladesh, customers
confidence was critically important. Loss of money by the customers of the
closed bank could have shaken the confidence of depositors of other banks. Senior
bankers were in favour of protecting the BCCI customers. Government finally
came up with a time bound solution. Government launched a new bank, named as
Eastern Bank, to take over all assets and liabilities of the closed branch of
BCCI. Shares of Eastern Bank were subscribed mainly by the government owned
banks, while some shares were given to a few individuals against their funds. Time
schedule was drawn to pay back all depositors money in phases. This innovative
scheme worked so well that depositors really got back their money as per
schedule. Customers of a closed bank were rescued by creating a new bank. It
was a miracle solution!
Another
incident of slightly different nature may be cited as an example of protecting
customers. National Credit Ltd (NCL), a non-banking financial institution,
established in 1985 faced serious crisis in 1993 reportedly for mismanagement and
unethical practices. NCL failed to pay depositors’ money and angry depositors
started protesting in front of NCL office. Considering the gravity of
situation, Bangladesh Bank came up with a solution for protecting the
depositors of NCL. NCL was closed down and a new bank National Credit and
Commerce Ltd. (NCCL) was established to take over the assets and liabilities of
NCL. Owners of NCL brought in fresh enhanced capital to float the new bank
NCCL. Practically NCL, a non-bank financial institution, was converted into a full-fledged bank under a modified name.
Customers were happy and owners were also satisfied for securing a bank
licence.
In
a market economy customers suffer, if a bank fails. Both the instances cited
here demonstrate deep concern of central bank and the government to protect the
depositors in challenging situations. These instances added to the confidence
of customers. Depositors believe that their money is safe in a bank.
Recently
unprecedented corruption crippled two government owned banks- Sonali Bank and
Basic Bank. Government provided rescue package from national budget. Allocation
of tax payers money for compensating corruption was unethical and aroused
public criticism. Sonali Bank, being a large organization, could have survived
without budgetary support. But Basic Bank would definitely collapse without
such intervention. This is probably the only instance in our country to save a
collapsing bank with budgetary allocation. Looking from another angle of view,
government as owner of the bank, owns the responsibility to meet capital
adequacy. Hence providing capital from tax payers money was legal but
unethical. many consider government’s action as financing of corruption.
Stake-holders
of bank:
Cited
instances reflect government and central bank’s concern, commitment and action
to safeguard customers interest. Central bank acts as regulator and government
acts on behalf of citizens. Except government banks, the government is not a
stake-holder. Owners or shareholders are considered as stake-holders. This is a
naïve perception. A close and critical interpretation suggests that customers
have greater stake than owners of a bank.
European
Union (EU) is the proponent of a new idea. EU has examined, how privately owned
banks were rescued with tax-payers money in the name of safety of customers. On
this account, US public exchequer suffered heavily, while instances are there
in many other countries as well. After analyzing European instances in
particular and global instances in general, EU concluded that owners or
shareholders are not the only stake-holders of banks, customers are greater
stake-holders. Instead of government protecting the banks, the customers should
protect their own banks. Unethical use of huge amount of tax payers money in
protecting banks might have prompted EU authorities to assign responsibility of
protecting banks on their customers. EU have passed a law making owners as well
as customers responsible for protecting their bank and suffer loss in case of
bank failure. The new law will be effective from 2016 in the EU countries.
Since
I am yet to know the details of the law, I shall not be able to explain the
operational aspects. Management principle demands that responsibility and
authority must co-exist together. I presume that customers must have been
provided with appropriate ‘authority’ so that they can undertake legal responsibility.
Meanwhile, Let us examine customers’ risk, risk mitigation process and their
responsibility in our country.
Customers’
Risks & Safety Measures:
Total
investment and statutory reserve of a bank may be roughly defined as its
working capital. 10-12 percent of the working capital is provided by the owner/shareholders
as equity. Rest 88 to 90 p.c of the working capital is provided by depositors. From
this point of view, customers’ risk far exceeds the risk of owners, who not
only own the bank but also form the Board of Directors and operate the bank. They
take care of their own interest. Who will take care of interest of customers
who provide about 90% of the bank’s working capital? Over a period of time, legal
and institutional system developed in our country to safeguard the interest of
customers.
Unlike
other industries, banking sector essentially operates under close supervision
of the central bank. This institutional system is universal. In all countries,
central bank is empowered and entrusted with the responsibility to safeguard the
interest of customers of banks. Banks
operate with customers money. but customers can not play any role in the
management of banks. That is where central banks comes in. Central Bank creates
balance between owners’ interest and customer’s interest. Without the vital
role of central banks, owners might have swindled customers’ money, rendered
the banks bankrupt and satisfied their greed. This happened during the decades
of 30s and 40s of last century. Many banks failed and depositors lost their
hard-earned money. This led to introduction of ‘scheduled bank’ system. Over a
period of time, central bank was gradually empowered to counterbalance the
greed and mismanagement of bank-owners. In addition to Companies Act, separate
Banking Companies Act was enacted for good governance of banks and safety of
depositors’ money.
Bangladesh
Bank constantly operates on-site and off-site supervision of banks.
Occasionally, strong actions are also taken. In recent years, Bangladesh Bank
removed the Managing Director of Basic Bank and chairman of IFIC bank. During
the end of last century, Bangladesh Bank removed more than 30 directors of
privately owned banks and also removed the Board of Directors of a bank and
appointed Administrator to safeguard customers’ interest. Bangladesh Bank faced
lost of hassle but did not retreat. These actions created positive impact on
the governance of banks at that time.
In
many developed countries, central banks are independent both legally and
professionally. Without independence, central bank cannot function as an effective regulator. Bangladesh Bank
suffers on this aspect. Apart from environmental disadvantages, Bangladesh Bank
suffers legal constraints. Bank Companies Act empowers Bangladesh Bank to
remove Directors or entire Board of Directors and appoint an Administrator. At
the same stretch, law restrains Bangladesh Bank from removing Directors or
Board of Directors, appointed by the government. This explains why Bangladesh
Bank could not remove the Chairman or Directors of Basic Bank, Sonali Bank or any
other government owned bank. Bank’s functions are same, though ownership
differs. This arbitrary clause of Banking Companies Act discriminates among
same category of scheduled banks and restricts the central bank from protecting
customers of govt. owned banks. The reason of unusual corruption and looting of
customers money in govt. owned banks can
be attributed to such legal anomaly. Law needs immediate amendment to stop
corruption & looting in govt. owned banks as well as to place all scheduled
banks under one legal provision.
Bank
management is another important safety valve for protection of customers’
interest. It is often said that public officials are the servants of the state
and they are not employees of the government. Government changes, but public
officials continue to serve the state. Same analogy applies to bank officials. Bank
professionals are the employees of the Bank and not of owners. To enforce this
principle, Bangladesh Bank has issued appropriate instructions. Banks’ Chief
Executive Officer who is the head of management and all employees, needs
approval of central bank for appointment. Owners can select the CEO, but cannot
appoint unilaterally. Similarly removal of CEO requires central bank’s
approval. An interesting example may be cited. In 2013, four CEOs tendered
resignation, arousing suspicion. Bangladesh Bank enquired & found that the
CEOs were forced to resign. BB immediately issued instruction requiring their
consent even for resignation. That is how central bank protect the CEO from
illegitimate influence of owners. In turn, it becomes CEO’s responsibility to
protect all officials from undue influence of owners and others. Thus Bank’s
professional cadre remains independent to safeguard the interest of customers
as well as the institution.
Yet
another device to protect customers’ interest is appointment of independent
directors, who are not share-holders. Independent Directors are expected to
keep vigil in the Board. Directors of the Board normally select their own
people. The system is yet to show notable examples in our country. However
gradual development of the system will yield fruitful results in course of
time.
Internal
audit system has also been rationalized for improvement of governance. Boards
Audit-Committee has been introduced so that irregularities committed by the
management, are reported to the board. External auditors also carry out sample
inspection to trace the trend of operations and irregularities.
Posts
0 Comments