Compared to other peer countries, Bangladesh not only has more commercial banks, but it also faces several related issues. These issues include lack of capital, bad loans, and excessive interference by owners and directors. Additionally, there are issues of management ambiguity under the guise of excessive control by the central bank, lack of various services, weak risk management, and a crisis in leadership development.
Currently, there are 52 local commercial banks in Bangladesh, both public and private. Conversely, India, which is a much larger country both in terms of size and population, has 33 local banks. Over the past two decades, at least 40 banks have been reduced through mergers and acquisitions in the country. Ensuring corporate governance and reducing unnecessary banks have strengthened their banking sector. As a result, the rate of non-performing loans has also come down to around 2 per cent.
The contrasting picture in the number of banks between the two countries is not just a statistic; it primarily highlights the differences in banking philosophy, political will, and control capabilities between the two countries. The current government in our country has already expressed its interest in financial sector reform. In this context, the government needs to seek an answer to a question. Does the country need banks just for the sake of having banks, or is it necessary to establish a truly effective banking system?
Through fundamental restructuring, India's state-owned State Bank of India has become one of the world's leading banks. In the latest quarter, the bank's net profit exceeded 210 billion Indian Rupees. In contrast, more than 44 per cent of the loans distributed by Bangladesh's government banks are now non-performing. This distressing situation in the country's banking sector has not appeared suddenly; rather, it has resulted from decades of managerial failures in the financial sector.
Due to prolonged political pressure, Bangladesh Bank has not been able to play a neutral role. Time and again, by rescheduling, writing-off loans, and providing special privileges, the actual defaulter information has been obscured. Consequently, the real state of banks has not been reflected even in financial reports.
In the past one and a half decades, 16 new banks have been approved in the country. According to the finance minister's statement in parliament, most of these were established for political consideration. Undoubtedly, having so many banks in a small market like Bangladesh has increased inter-bank competition. Consequently, many banks have been forced to give risky loans. At the same time, the culture of bad loans and money laundering has led many banks to be on ‘life support’.
The incident of dissolving the boards of directors of 15 private banks after the mass uprising in 2024 indicates how much damage the banking sector irregularities have caused. Not only private banks, but each government bank also has a deficit of reserves and capital running into several billion taka. They survive only because they are government-owned. Otherwise, by market principles, these banks would've gone bankrupt by now, and customers and depositors would've faced severe crises.
After the Asian crisis of 1997 and 1998, South Korea made significant changes in its banking sector. Instead of approving new banks, they forced weak banks to merge with strong ones. Earlier, while there were many small and weak banks, this decision led to a few strong banks developing in the country. Because even though the number of banks decreased, their capital size started to increase. It is because of this strong foundation that South Korea now mainly provides banking services digitally.
During the time of this financial crisis, another capital and liquidity-strapped country, Malaysia, integrated 54 banks to establish 10 powerful anchor banks. These anchor banks can easily exchange assets among themselves. Without opening any new branches, they managed to reach customers through digital services.
India has popularised the concept of ‘banking without banks’ among the general public through digital services. They are now offering transactions and loan facilities with the help of Aadhaar cards and mobile apps. Brazil's digital bank service named ''Pix'' has now increased the use of artificial intelligence or AI. Through this, their ''neobank'' has now become the world's largest digital bank.
These examples prove that it's possible to discipline the financial structure by adopting strategic policies without increasing the number of banks or physical branches.
In the current reality, our government too has a great opportunity to reorganise the banking sector. In this case, along with private banks, there is a need to review the asset quality of state-owned banks and conduct forensic audits. There are major allegations that the current picture in the financial reports of the banks is not real. Therefore, policies and decisions must be taken based on accurate information. Reducing the number of government banks based on information is also very crucial.
Comparatively, a strong government bank could be developed like India's State Bank of India by merging two or three weak government banks with one strong one. Other government banks could be handed over to the private sector, following the examples of Pubali and Uttara Banks.
The complexity that has already arisen regarding the process of merging five Shariah-based banks during the interim government period must be resolved immediately in the interest of customers and depositors. Under no circumstances should there be any more government-owned banks.
Like many others, development partners also say that ensuring the autonomy and capability of the financial sector's regulatory body, Bangladesh Bank, has now become crucial. The central bank must be run with professional leadership, completely free from political influence. At the same time, stringent standards must be imposed when licensing or approving new banks.
It's important to modernise the supervision system of banks, ensure effective participation of independent directors on the boards, and stop the direct intervention of the board in loan approvals. It is also necessary to ensure corporate governance by amending the Banking Company Act. Enhancing the capability of the banking tribunal in recovering non-performing loans and modernising the bankruptcy law should be part of this reform.
In restructuring the banking system, progress must be made by addressing the above-mentioned problems. We have many examples in front of us. If we can prove the willingness to reform, development partners are ready to step forward. It can almost be said with certainty that if modernity does not come to the banking sector by breaking the old model, there will be no diversity in our economy.
#Mamun Rashid is an economic analyst, Chairman, Financial Excellence Limited
*The opinions are the author's own.
#This article, originally published in Prothom Alo print and online editions, has been rewritten in English by Rabiul Islam