Banking: Challenges & Improvements

April 25, 2020

Should not we see Improvements alongside Challenges of the Banking Industry of Bangladesh?

(Published in the Financial Express)

Dr. Shah Md Ahsan Habib[1]

Challenges and vulnerabilities of the banking industry are amongst the major headlines of the newspapers and key areas of discussions in recent times. Especially, the volumes of non-performing loans (NPL) and governance issues became the key issues for discussions and concerns. Even questions are being raised, whether trusts on banking industry are getting eroded!!! Has banking industry really performed so badly? Don’t we have areas to say good words even? Alongside creating pressure on misdeeds in the sector, should not we promote and support improvements and sound practices? Unfortunately, though vulnerabilities of the banking sector are well circulated, success stories and certain good governance practices are hardly disseminated and known!       

Regarding market size, the banking sector expanded over the years in terms of greater number of formal institutions, higher number of financing instruments, and bigger volumes of assets. Unlike in developed economies and sophisticated markets, both long-term and short term financing needs of the country are met by the banking industry. Volumes of deposits expanded, and it is really good to see that proportion of rural deposits in the banking industry increased over the years. However, one key weak area of the banking industry has been its liability side where banks depend almost completely on deposits. To maintain the existing domestic production and to attain the ongoing high growth, it is very important to have a sound and stable banking sector considering the extensive extent of dependence of the real sector of the economy on the banking sector of the country. It is well known that other sources like bond and equity market, non-bank financial institutions, and external sources   are not significant as the sources of investment and finance in the country. Banking sector is the key suppliers of these finance and investment needs.

Regulatory changes have installed in several areas of banking and financial sector either to align these with the global standards or to address internal needs and requirements. To cope with the international best practices and to make the bank’s capital more risk sensitive as well as more shock resilient, risk based norms was introduced from 2009; and another updated version has been issued in 2014 (in line with Basel III). Major improvements can be observed in the adoption of internationally recognized standards of bank supervision and reporting arrangements. Bangladesh Bank’s interventions for installing financial crime and money laundering regulations, promoting inclusive banking, and supporting transparency and financial literacy have been praiseworthy.  

It is recognized that as a whole, banking industry could not deliver to the level of expectation in terms of addressing the challenge of loan defaults. Specially, government controlled banks faced several difficulties and scams in recent years. Some issues of board interference and operational inefficiency came up. It is also true that regarding the performances of state controlled banks, we are not unique. Yes, it does not justify their performances, however, it indicates that it is not an easy challenge to address, and it is very important to place our expectation at the reasonable level.

Private commercial banks are dominating the banking market, and there is no doubt that performances of some private commercial banks are laudable. On the one side governance is a key challenge, and there are also examples of good governance in some private commercial banks that are replicable. Are we really aware of these leadership cases where top managements and boards performed tremendously to transform certain private commercial banks? In a recent study on leadership and governance in banking, we have captured and presented these cases at BIBM. Unfortunately, we have seen only the statements associated with certain vulnerabilities on leadership and governance in banking in most newspapers on the following day, not the success cases of banks to follow. Probably, we failed to identify the right way of dissemination, and we should try to find. It is also true that success cases of banks could not draw due attention of all of us, and criticisms and vulnerabilities have really be attractive.  

We cannot deny that risk absorption capacities of most banks improved in response to the enforcement of stringent loan classification norms, provisioning requirements, and capital adequacy regulations. There are challenges of capital adequacy in the government controlled banks and in a few private commercial banks. Yes, regular capital injection using tax payers’ money is not desirable. However, all the services of the state control banks must also be priced to understand the real shortage of capital or the true losses.

Banking sector has brought remarkable changes in the service quality using modern technology. Centralization has changed entire systems of handling loan and other product processing.   Mobile banking, agent banking, financial literacy drives, and green banking ventures are laudable. These initiatives have brought notable improvements in the financial and economic inclusion scenario of the country, and the role of regulator is praiseworthy in this regard. There are differences of opinions on the role of addressing these inclusive issues as part of the monetary policy and financial stability efforts of the Bangladesh Bank. I believe, these efforts of the Bangladesh Bank are very much in line with the national priorities, and desirable.     

Improvements are visible in the area of banks’ efforts to improve capacity of bank employees. In certain areas like international trade, banks now possess specialist people to facilitate trade services. However, capacity and awareness development of the key stakeholders needs further impetus. With the growing compliance requirements, processes, technologies, and financial crimes, employees of banks need regular training and capacity development programs. There is no doubt that situation improved remarkably and some banks are now allocating good amount of resources and efforts for capacity development by undertaking on-the-job and off-the-job training programs. However, gaps remain which is especially visible in the government controlled banks. Top managements and board members of banks must be brought under effective capacity and knowledge enhancement programs on leadership and governance issues. 

Addressing customers’ complain and information rights are crucial, and I see reasonable level of improvement in these areas. Today, the customers have disclosed data to decide whether to keep fund with a bank or not. Customers are more aware today. It is a great development. Several factors have contributed to the development like greater transparency and data disclosers by the regulator, policy makers and banks; proactive roles of academic and research think tanks and civil society organizations; proactive roles of electronic, online and print media. The development is commendable and is helping to create due pressure to act properly for addressing market vulnerability. As academicians, it is now relatively easy for us to identify statuses and vulnerabilities of the banking industry. However, we should be very careful that our comments and remarks should be reasonably placed to put pressure on under performers and encourage performers. As an approach, one may keep mum on the success areas and push for repairing certain things of the banking industry. Considering the sensitivity of the banking sector, probably it is better to incentivize good performers and deeds by inspiring them with good words and to push for addressing vulnerabilities side by side. 

[1] Professor and Director (Training), BIBM ([email protected]).

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