The media has been abuzz with concerns about the rampant abuse of Bangladesh's financial sector for more than a decade. In response, the government has formed a banking commission to investigate these issues and recommend strategies for reform. Numerous individuals and forums have published articles and held workshops aimed at diagnosing the sector's problems. However, a recent paper by the CFA Society provides a more focused perspective, highlighting areas like Bangladesh Bank's role, banking governance, non-performing loans (NPL) management, strengthening the capital base, regulatory clarity, and reforming the business mindset of state-owned commercial banks.

With over 44 years of corporate experience, I firmly believe in the 80/20 Pareto Principle, where 20 percent of the problems account for 80 percent of the outcomes. In Bangladesh's financial sector, the core issue is Bangladesh Bank's failure to regulate effectively, driven by crony capitalism and personal gain. Though the country has comprehensive laws, their enforcement remains weak due to corruption. A clear analogy can be drawn with Bangladesh's traffic laws, which, despite being robust, are ignored because offenders rarely face consequences. Similarly, in the financial sector, regulations are either poorly enforced or manipulated by powerful business interests, resulting in multiple scandals.

One critical problem is the lack of accountability for wilful defaulters. The CFA Society has recommended publishing the names of these defaulters, but more stringent actions are needed. Many borrowers divert loans to personal luxuries -- buying luxury cars, properties or investing in the stock market -- instead of using them for their businesses. Banks should investigate these diversions and seize misused assets. Wilful defaulters should also face travel restrictions, prohibitions on staying in luxury hotels and limitations on credit card usage. Without these measures, defaulters will continue to abuse bank funds with impunity.

As a bank board member, I have witnessed systemic weaknesses first-hand. One troubling practice is "name lending," where loans are issued based on reputation rather than a thorough analysis of a borrower's business model. This results in banks paying insufficient attention to financial statements and audit reports. It is not uncommon in Bangladesh for companies to report profits despite incurring losses as banks are reluctant to lend to loss-making firms. This manipulation inflates financial ratios, such as the debt-to-equity ratio, enabling further lending. Simple financial indicators, like the cash conversion cycle, often go ignored, leading to account fabrication. Additionally, struggling banks continue to receive unqualified audit opinions, which hide deeper issues.

Another major issue is concentration risk, where banks rely too heavily on large depositors and borrowers. If a major depositor withdraws funds, the bank's advance-to-deposit ratio can be severely impacted. Furthermore, the current exposure cap of 15 percent for funded and 20 percent for non-funded loans to large borrowers increases risk in case of default.

Collateral management is another weak link. Senior officials often fail to physically inspect or adequately evaluate the collateral provided by borrowers. There have been cases where borrowers did not possess the land or property in question, or where collateral was significantly overvalued. Banks' legal departments and legal counsel should be held accountable for future discrepancies in collateral assessments.

While Bangladesh Bank conducts annual comprehensive audits, there have been reports of underreporting of provisions that the regulator has overlooked, raising suspicions of corruption or undue influence.

The new government has a unique opportunity to reform the financial sector, which is vital for Bangladesh's economic progress. Unless swift and decisive action is taken, these persistent problems will continue to undermine the country's economic potential. Reforming this "Augean stable" is crucial to ensuring a healthy, sustainable financial system.

The author is chairman of Unilever Consumer Care Ltd and chief adviser of the board at Crown Cement Group