(Talking points)
- Khondkar Ibrahim Khaled*
1. Broad financial arena is devided into two distinct
markets –(i) Money market and (ii) Capital market. Money market includes banks,
non-bank financial institutions (NBFls), Microfinance institutions (MFls), and insurance
companies. Capital Market includes stock exchange, brokers, bond market and
allied institutions. Present discussions will be confined to Banks and NBFls.
2. Economists define banking as financial
intermediation process. Law provides a functional definition stating that ‘a
banker collects deposit from the depositos; lends and invests; and repays back
to depositor on demand or otherwise’ (N.I.Act, Sec-3). Collecting deposits and
lending money are the principal functions of a bank. With the passage of time,
banks have entered into many more areas of activity like export, import, bill
negotiation and collection, inland and foreign remittances; issuing guarantee, providing ATM and internet banking services etc. Detailed
list of functions of bank has been provided at sec-7 of Bank Company Act. On
the other hand, scope of acclivities of non-banking financial institutions are
narrow and limited to collecting
funds from people and institutions and providing
lease financing and other short term accommodation.
3. Banks operate under the legal provisions of Negotiable Instrument Act,
Bank Company Act, Bangladesh Bank Act, Company Act and other allied laws. Banks
adhere to operational practices established through long period of time and
judgments of legal courts. Bank are also guided by Foreign Exchange Regulations,
Monetary Policy and Operational Guidelines issued by Bangladesh Bank. On the
other hand NBFIs operate under Financial Institutions Act and are regulated and
monitored by Bangladesh Bank. It may be mentioned that Micro-finance
Institutions (MFls) provide micro-finance under MFl Act, MFls are regulated and monitored by Micro Finance
Regulatory Authority (MRA), an independent sister organization of Bangladesh
Bank.
*Former Chair Professor of Bangladesh
Institute of Bank Management (BIBM), Former Chairman of Board of Directors, Bangladesh Krishi Bank
and Retired Deputy Governor of
Bangladesh Bank.
4. Banking companies are typically different from all
other types of companies. Owners of other companies provide paid-up capital and
arrange entire working capital, while owners of banking companies provide only
around 10% of working capital as paid-up capital. Rest 90% finance is procured
from customers’ deposits. Governance rests with Board of Directors, elected by
share-holders, while 90% Stake-holders remain outside the management. Like all
other countries, Bangladesh Bank, the central bank of Bangladesh, has been
given the responsibility to safeguard the interest of depositors. To meet this
responsibility, Bangladesh Bank has been empowered with adequate authority
under Bangladesh Bank Act and Bank Companies Act.
5. (a) A new bank can be opened only after obtaining
license from Bangladesh Bank. Banks need to obtain permission of central bank
for opening branches at different places, (b) BB can restrict credit limit of
banks for loanees, (c) BB formulates and declares monetary policy on half
yearly basis, (d) BB determines Cash Reserve Ratio (CRR) and Statutory Liquidity
Ratio (SLR). (e) Permission of BB is necessary for appointment of Managing
Director and all other Directors of the Board. Removal of M.D also requires BB
approval. (f) BB can remove M.D or any other Director on reasonable grounds.
(g) For serious deterioration of governance or for safeguarding depositos’
interest, BB. may remove entire Board of Directors and depute ‘Administrator’
to run the Bank.
6. Each bank can fix or refix interest rates on
deposits and advances and report such rates to BB. Neither BB nor government
shall interfere with interest rate fixation. This is in conformity with open market
economy policy as well as the Law of Competition.
7. Rate of classified loan indicates health of a bank.
Good banks should contain classified loans below two percent. Provision is kept
against C.L by interfering with profitability of the bank. At present, local
banks are showing very high rate of C.L, indicating bad financial health.
Government owned banks’ average C.L stands around 30%, while private banks
average C.L ratio is around 11%.
8. Banks with high rate of C.L suffers reputation.
Their L.Cs are not honoured by banks abroad. In 2004, a law was passed, allowing
the banks to write-off bad loans under certain conditions. Written off loans
are removed from the balance sheet of bank so that it looks better! Written-off
and classified loans together now exceeds 1.30 lac crore taka in our country.
BASIC Bank in government sector and Farmers Bank Ltd in the private sector are
often cited for notorious banking.
9. Reason for high rate of C.L is attributed to weak
governance, malpractices by owners of private banks and influence by powerful
people at the public banks. Directors can not take loan from his own Bank. But
swaping of loans is widely practiced. Bank ‘A’ provides loan to Director of ‘B’
bank, while bank ‘B’ allows loan to Director of bank ‘A’. Such practice is
unethical. Malpractices often give rise to corruption amongst bank officials.
10.
It is often alleged that weakness of central
bank leads to weakness of the banking sector. Independent and professionally
strong central bank is a prerequisite for sound banking system. In our country,
central bank is independent on paper. Practically, it succumbs to undue
pressure from Ministry of Finance as well as from other powerful groups. For example, recently at the instance of
Finance Minister, the Governor of B.B went to a hotel to join a meeting of
private bank owners and reduced CRR by 1%. This is unprecedented in the whole world,
because of conflicting interest.
11.
After amendment of B.B Act in 2004, Bangladesh
Bank is not required to consult the government in any matter. Instead
government may liason with BB. only through a co-ordination committee. Such
legal refinements are offen ignored. Strengthening of central bank by
protecting its independence as well as professional development is the first
step towords recovering the banking system from present condition.
12.
Large number of cases are filed by banks in
Artha Rin Adalat for recovery of bad debts. Law prescribes time limit of 6
moths for disposal of a case. Practically, most of the cases remain pending
because of shortage of courts.
13.
Cases of big
amount of loans often remain pending at higher courts. Stay orders also persist
for long period, delaying disposal. Creation of special benches at H.C may ease
the situation.
14.
For academic
interest, we may discuss about Islamic Banking system in Bangladesh. Islamic
Bank (Bangladesh) Ltd transacts highest volume of business among all banks.
Trend continues even after change of ownership. Other Islamic Banks are
performing well. This demonstrates people’s acceptance and faith in Islami
banks. Yet, question can be raised, whether the banks can be called ‘Islami’.
They base their philosophy on two Islamic ideas-(i) ‘Riba’ is prohibited and
(ii) ‘Bayee’ is allowed. Riba means ‘interest or any amount over the principal
amount of loan’. ‘Bayee’ means normal business. Let us examine Islami banks’
position on these points. Islami banks recover ‘profit at the time of
disbursing a loan. They also distribute profit on time deposits. they claim
that such profits are not interest (Riba) as they share business (Bayee) with
customers and also share profits with customers. But Bank Company Act
explicitly prohibits ‘doing business by the bank’ and in practice no Islami
bank official remain engaged in business with its loanees. Moreover, how can
the bank recover profit as ‘mark-up’ at the time of loan disbursement, when the
loan is yet to be used in proposed business. Critics, therefore,
accuse Islami banks for exploiting customers’ religious sentiment for business
purposes.
15.
For
performing business in foreign currency, banks are guided by Foreign Exchange
Regulations, framed and up-dated by Bangladesh Bank. Central bank maintains
foreign exchange reserve and monitors foreign exchange transactions.
16.
Banking is a need based business which changes
with the change of customers’ needs. Globalization also influences bank
services. During 70s and 80s, development banks allowed long term loans and
commercial banks used to deal in short term loan. Now the gap has narrowed
down, and all banks are dealing with both long and shot term loans.
Globalization has advanced the idea of universal banking.
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