Bangladesh Bank’s imprudent policy triggers volatile situation

The country’s finance sector has often been hit with a volatile situation because of various imprudent and immature policies, initiatives and announcements undertaken by Bangladesh Bank, resulting in a rise in withdrawals of money by depositors, as well as a growing pressure of inflation on the people. The central bank’s recent announcement on the merger of weak banks also panicked the depositors, as well as the initiative on forced merger propagated a volatile situation in the finance sector.

Bangladesh Bank also continued to allow five Shariah-based banks owned by a certain conglomerate to lend to their clients despite having large deficits in their current accounts, raising questions about the central bank’s image because of maintaining a double standard. Therefore, banks are not taking many good initiatives of the regulator positively.

After joining office, Bangladesh Bank governor Abdur Rauf Talukder said at a press conference on 4 August 2022, “Ten weak banks have been identified for establishing good governance in the banking sector.” The governor’s announcement followed depositors withdrawing money en masse from several banks which were under special observation.

The central bank appointed coordinators at the banks under observation beforehand. Previously, central bank officials could join the meeting of those banks’ boards and executive committees and they can no longer do so. Though they found irregularities they could not take any action in many cases. Currently, 15 government and private banks are being operated by observers and coordinators.

Wishing to go unnamed, a managing director of a bank currently under monitoring said when the regulatory agency’s chief declares a bank weak then it becomes difficult for the bank to survive, and that does not fall under the professional attitude of the regulatory agency.

Bangladesh Bank governor said at an event on 17 November 2022 the prevailing dollar crisis by December and there is no barrier to opening of the LCs (letters of credit). However, anyone following over-invoicing and under-invoicing for import would not be spared, he warned.

Since then about one and a half years have passed, and the dollar crisis has not been overcome yet. Small and medium entrepreneurs cannot still open LCs as per their demands. Many experiments have been conducted on the dollar market. Besides, Bangladesh Bank continues to sell dollars gradually. Foreign reserves have dropped below 25 billion US dollars now from over 33 billion US dollars in November 2022. However, net foreign reserves remain below 15 billion US dollars.

Bangladesh Bank also fixed the exchange rate of dollar at 117 taka per dollar from 110 taka per dollar as per the prescription of the International Monetary Fund (IMF), and people concerned from the sector opined crisis will pass in the long run despite the rise in dollar prices in the short term.

The central bank kept the bank lending interest cap at 9 per cent since April 2022 before introducing the SMART (six-month moving average rate of treasury bill) reference rate for determining lending rates in July 2023 amid a financial crisis, in particular, to prevent high inflation. Last week, the SMART interest rate was lifted and a market-driven interest rate was introduced, what the economists said can bring relief to the country’s economy.

A change came to the board of directors of the private National Bank Limited last week with Bangladesh Bank appointing new shareholding directors and three independent directors. Previously banks took the decision on a change to ownership, but Bangladesh Bank itself changed the banks’ board. These three independent directors are family members and lawyers of a certain conglomerate based in Chattogram. As a result, allegations surfaced that the position of independent director also became controversial.

The policy of Bangladesh Bank mentions voluntary mergers this year and forced mergers in the next year, but initiatives have been taken recently to merge five banks because of several at the high enthusiasm of several officials of the agency. Panicked over the move, depositors withdrew 25 billion taka from BASIC Bank and a huge amount from National Bank. Both BASIC Bank and National Bank resisted the forced merger move. In the meantime, the central bank is taking no step on the Shariah-based banks – Islami Bank, First Security Bank, Social Islami Bank, Global Islami Bank and Union Bank -- despite their current accounts turning negative.

Former chief economist of the central bank, Mustafa K Mujeri said, “Several directors have been given the chance to damage the banks instead of conducting the monitoring, resulting in a volatile situation in the entire sector. Today, banks become weak because of not making the right and strong decisions at the right time. The central bank should not declare anyone weak, rather the needs to focus on improving the midlevel banks through monitoring. There should have been options for voluntary mergers for banks instead of forced mergers. A policy to catch one and spare another cannot continue.”

Had the exchange rate been left on the market before, the problem would have been solved already. Yet, what happened lately is the best of a bad bunch, he added.