Fabliha Sadika | Session 2020-21 | Department of Finance
A strong economy largely depends on a strong banking system. As a developing economy banking system Bangladesh has to focus more on its banking sector to promote economic growth. Bank compromises more than 80% of all finance activity providing investable funds to both the public and the private sector they are also facilitating international trade and service payments, generating employment, and foreign remittance, strengthening the rural economy, and developing the housing sector in Bangladesh.
The banking system is now faced with a slow-motion banking crisis principle at the government-run Bank more than two-thirds of the banks in the country are weak. The current banking and non-bank financial sectors are in the most vulnerable position.
In recent years, this crucial sector has been facing many challenges, which include among others a big volume of nonperforming loans (NPLs), lack of corporate governance increasing capital shortfall, and slow loan recovery that have serious concerns about the efficiency and soundness of this sector, non-compliance with ethical standards leading to various types of banking scams such as money laundering and nonperforming loans (NPLs). The list of the scam is not small and the amount of misappropriated money is quite big. All these misappropriated money turned into default loans increasing the financial burden of the banks. The two main reasons for the unusually high default loans in the state-run banks were enormous corruption and inefficiency It is open to everyone that the country’s banking sector has been mired in a series of scams and irregularities such as the funneling of loans worth billions of Taka by violating banking rules and procedures to influential people who have been known to be legs with repayments. Bulks of these bad loans are concentrated in specific sectors. The distressing trend of mismanagement and nonperforming assets in industries such as textiles manufacturing and real estate is visible. The consequences are far-reaching, affecting not only the banking sector but also the broader economic stability of Bangladesh. Banks in Bangladesh have been facing credit risk profoundly for a long time; our NPLs are very high compared to the international benchmark. In the changing economic conditions, managing credit risk is the greatest challenge for the banking sector. In Bangladesh, 86 percent of financial assets are owned by banks. Our economic growth is heavily dependent on bank finance, and vice versa. The better performance of an economy is reflected in bank performance as well because in such a condition, bank borrowers can invest their loans productively and repay the same on time. If an economy declines, it must be reflected through low profitability and high NPLs.
The rise of interest rates harms banks' profitability. It may increase interest expense and reduce interest income, generating low profits. Profit reduction is a hindrance to capital accumulation.
Liquidity risk generally arises from a maturity mismatch between assets and liabilities. Banks in Bangladesh often face liquidity crises due to mismanagement of funds. However, the recent liquidity problem in five Islamic banks has originated from a sudden outflow of funds that was not offset by the inflow. The BB lent them continuously to ease up their liquidity constraints.
Recent experience shows many banks incurring catastrophic losses due to abnormal appreciation of the US dollar. The Bangladesh Bank had to sell the dollar in the market to rescue these banks from dollar crises. The central bank itself also faced the problem of foreign currency reserves.
Banks invest in stock markets to generate profits by diversifying their portfolios. But our stock markets are not guided by rational propositions and company fundamentals. These markets have huge information asymmetry—prices do not reflect performance. When banks invest in such markets, they assume enormous risk. Such participation in stock markets might bring abnormal losses to banks.
Increased financialization of the Bangladesh economy also created an environment where huge wealth has been accumulated by a section of the rich by defrauding banks, in particular state-owned banks. It is generally suggested that the stock market scams in Bangladesh are most likely to be linked to this fraudulent financial practice with the ultimate goal of acquiring control of various listed companies by bankrupting small investors.
Unfortunately, while the banking sector is passing through such a financially difficult period, the government's borrowing from the banking system continues to be risky. The central bank is aware of the risks and troubles facing the country's banking sector. Nevertheless, regulatory monitoring and intervention to curb the irregularities are still weak. Unfortunately, the weakness of the central bank has intensified the risks and vulnerabilities in the banking sector.
The banking sector is perceived as the biggest risk to the economy of Bangladesh. Addressing these vulnerabilities requires concerted efforts from regulators, banks, and policymakers to strengthen governance frameworks, improve risk management practices, and ensure regulatory compliance.
