RECENT DEMANDS OF BANK OWNERS: A CLOSE ANALYSIS

(Key note paper for Annual Banking Conference, BIBM

Second Day : 5 December, 2016)

                                                                Khondkar Ibrahim Khaled

Recently Bangladesh Association of Banks (BAB), an association of bank owners, placed thirteen demands before the Ministry of Finance for consideration of the government. BAB mentioned these demands as ‘unresolved issues of private banking sector’. The issues may be placed under three categories –(i) issues relating to amendment of the Bank Company Act; (ii) issues relating to circulars/directives given by Bangladesh Bank and (iii) issues relating to tax payments and contribution to Workers Profit Participation Fund.

Issues Ralsed 

First category of demands raises three legal issues (i) prior approval of Bangladesh Bank for appointment of Directors, (ii) continuation of tenure of sponsor directors for more than two terms, and (iii) definition of family for inclusion of directors from sponsor family.

 Second category of demands raises as many as 11 (eleven) issuest : (i) waiving provision requirement for unclassified loans, (ii) relaxing ceiling of 30% of paid-up capital for acquiring bank’s fixed assets and also to allow investment of excess fund in stock market, bond market of foreign countries through off shore banking, (iii) withdrawal of restriction on holding more than two board meetings in a month, (iv) withdrawal of restriction on holding board meeting outside the city where the Head Office is located, (va) relaxing norm of opening of urban and rural branches at one:one (1:1) ratio, (vb) allowing opening of more branches in Dhaka and Chittagong city (vc) amending definition of rural and urban areas for opening of branches, (vd) lifting of restriction on space of branch premises, (ve) relaxing restriction on renting branch premises for exceeding 10 years, (vi) waiving restriction on renting out banks own building, and (viii) waiving restriction on ERQ credit card.

Third category of demands raises 4(four) issues: (i) exemption of tax on provisions, (ii) waiver of tax in case of transfer of bank shares to legal heirs, (iii) appeal for considering zakat and CSR expenses as allowable deduction under section 29 of Income Tax Act, and (iv) seeking exemption from Workers’ Profit Participation Fund.

A Close Analysis:

Bank Company Act:

(i)              No objection for Directors: According to Section 15 (4) of Bank Company Act, an elected Bank Director requires prior approval of Bangladesh Bank. BAB states that such stipulation curtails share holders rights and Directors are leveled with Managing Director.  Section-15 (6) of the Act prescribed eligibility criterea for becoming bank director. Bangladesh Bank is empowered to eusure implementation of such stipulation. Hence, an elected director must obtain prior approval to ensure that he is eligible as as per law. Question of leveling with Managing Director does not arise. Because, MD is the chief executive as well as a director of the Board and he also reqnires to fullfill eligibility criteria.

Let us examine the case of Members of Parliament, who are elected by large number of voters and sit at the highest legislature of the country. MP candidates require to show CIB clearance of Bangladesh Bank for seeking nomination. If by omission, some one gets elected and later on it is revealed that he was a bank defaulter at the time of election, his election will be declared as void, If Members of Parliament require to be cleared by the Central Bank on some issues, then why a bank director feels embarssed for doing the some thing. It must be ensured that a bank director is not a bank defaulter. He is to be checked on some other ponits as prescribed by section 15 (6). 

(ii)           Tenure of Directors : Section 15 Ka ka of Bank Company Act restricts tenure of directors upto 2 terms of 3 years each i.e 6 years at a stretch. BAB proposes to withdraw such restrictiors for ‘Sponsor Directors’, claiming that such restriction ‘deprives them of their position and wealth’. Rationale of the restriction is that directors should rotate so that no vested interest group is formed in a financial institution. Restriction facilitates election of other share holders, who also contribute to paid-up capital. It is not clear, how their position and wealth is eroded, because their centribution to share capital remains unchanged.

Let us ponder overa basic question. Bank’s total working capital comes from two sources (i) owners’ (share holders) paid-up capital and (ii) customers deposits. Less than ten percent of working capital comes from paid-up capital, while more than ninety percent comes from customers’ deposits. Thus customers’ stake is overwhelmingly high, compared to owners’ stake. If any bank fails, owners suffer less than 10%  and customers suffer above 90%. To safeguard owners’ interst, directors sit in the Board of Directors,  which does not include any one to look after customers’ interest. That is why all countries of the world enacted law to empower central bank to safeguard customers’ interest. Law restricts tenure of directors so that interest group does not consolidate their strength.

For developing vested interest, there is no difference between sponsor director and other directors. Such differentiation may endanger safety of public  money. Hence BAB’s appeal is not rational in this regard.

Limitation of duration of bank directors tenure is not a local situation, it exists in other countries also. Neighbouring countries including India have legal restrictions on bank directors tenure.

(iii)        Family definition : Section-14 ka (explanation) of BC Act defines family members as husband, wife, father, mother, son, daughter and persons dependent on him (director). BAB recommends that such family member who are matured by age and who are income tax payces shoud not be considered as dependant person. Rationale of this law is to restrict concentration of share among near relations, who may form interest group. Dispersal is a possible way of discouraging formation of interest group. From this perspective, prescribed deifinition is workable. Proposed exclusion of economically independant relation from the definition  of ‘family’ may jeopardise the interest of customers and the bank, because of concentration of share among near relations.

Bangladesh Bank Circulars/ directives:

(i) Provision for unclassified loans : Banks pay tax on  provisions which are not allowable deductions under Income Tax Act. Bangladesh Bank directives to make provisions against classified as well as unclassified loans are aimed at minimizing financial risks and strengthening the banks so as to ensure safety of customers deposits. This is universal practice and need not be interfered with. However, BAB may take up the issue with Board of Revenue to declare provisions against unclassified loans as allowable deductions.

(ii) Other issues relating to B.B : Quite a few issues have been raised relating to utilization of paid-up capital, Board & Committee meetings, opening of branches in cities, urban and rural areas, space and rent of premises, using bank's own building for rental purpose, etc. Bangladesh Bank has issued circulars/ directives from time to time on these operational issues for facilitating good governance. These directives are not permanent in nature. Directives are changed with the change of environment. BAB may discuss these issues with Bangladesh Bank explaining their point of view. These issues should not have been placed before Ministry of Finance, because these do not fall under their jurisdiction.    

(iii) Independence of central bank : BAB must not overlook the aspect of independence of Bangladesh Bank as well as jurisdiction of action. Independence of central bank is recognized in all countries. In Bangladesh much more has to be done in this respect. Yet, legally Bangladesh Bank has been made independent in respect of government interference. Previously, Bangladesh Bank Act provided some link between the government and Bangladesh Bank in matters of discussion on monetary policy. B.B Act (Section 7/A (a) and 7A (b)) now provides independence in matters of monetary policy and foreign exchange policy. Now a co-ordination committee serves the purpose of exchanging views. But the government has no scope of legally advising Bangladesh Bank about its actions under prescribed law. Hence, issues raised by BAB in matters of directives given by Bangladesh Bank cannot be considered by Ministry of Finance.         

Tax-related Issues

Waiver of taxes : BAB has demanded waiver of taxes in case of transfer of shares to legal heirs. They have also appealed for considering Zakat and CSR expenses as allowable deductions under section 29 of Income Tax Act. CSR expenses are tax exempted for 22 sectors. Request has been made to incorporate some other sectors as well. These demands appear to be reasonable, as these expenses are for social benefit. BAB may take up these issues with Board of Revenue. BAB has rightly brought it to the notice of Finance Minister.

Workers Profit Participation Fund : For the welfare of employees and also for sharing profit, Workers Profit Sharing Fund has been created. BAB's contention is that bank employees are not workers, as banks are not manufacturing concerns. For the purpose of this Fund, banks and financial institutions have been included in Labour Act. Objective is to include large number of employees of banks and financial institutions in the welfare arrangement. Profit sharing is a concept of social equity. It embraces manufacturing, trading and service sectors. At present, about 50% of GDP comes from service sector. Hence this sector cannot be excluded from social equity concept. BAB's demand does not match social expectation.

Concluding observation

Unholy alliance ? : BAB delegation met Finance Minister to place their demands. This is normal practice. It was reported in the newspapers that president and some members of Association of Bankers Bangladesh, an association of chief executive officers (CEOs) of banks, accompanied the BAB delegation in support of their demands.

Owners and professional executives are two separate, diverse and distinct streams with diverging interest and responsibilities. For the interest of the banks, both the streams work together and balance each other. One must not collaborate with the other to strengthen class interest of any group. Such collaboration will jeopardize balance and erode organizational solidarity.

Analogy can be drawn by citing the example of a modern state. Legislature, Administration and Judiciary, the three pillars of a modern state work harmoniously with each other and also balance each other. If any of the pillar 'collaborates' with another or steps into the shoes of another, the state suffers. Governance crambles. Hence, the state ensures that each of the three pillars remains independent; work together, but does not collaborate; balance each other and never steps into the shoes of any other.

Central banks of all countries are entrusted with the responsibility of safeguarding the interests of bank customers. Central banks implement their legal responsibilities with the help of CEOs and professionals. that is why CEO of a bank can neither be appointed nor be removed by the Board without the consent of Bangladesh Bank. CEOs and professionals must remain conscious regarding their distinct role and legal bindings. They will work with the owners and must not collaborate with class interest of owners. Co-operation is healthy and collaboration is unethical and unholy.