Economy

The Bank Job

Recently, the central bank approved six new private banks associated with lawmakers and people with close ties with the prime minister. Does our economy need more private banks at this moment?

Akram Hosen Mamun

	Photo: Shameem Bakhshi

A politician owning large shares of banks is not a new phenomenon in this country. But the central bank giving approval to six new private banks linked with people who are either lawmakers or influential people with close ties to the prime minister draws attention even in our country. The Bangladesh Bank's (BB) decision is not unanimously welcomed by the economists and commentators across the spectrum.

On the contrary, the issue has given rise to heated debate about the necessity of more private banks in our economy, on the one hand, and on the other, the BB has lent its moral integrity into question by the decision. The part of the "civil society" and the news media and most importantly the general public who are critical of the decision are saying that the authorities gave in to political pressure and compromised their principles on the matter.

Economist Debapriya Bhattacharya, Distinguished Fellow of the Centre for Policy Dialogue (CPD), is among the opponents of the BB's move. He says, "While there is a need for more financial deepening of the Bangladesh economy, I do not think more banks will do the trick at this moment". Defending his position on the issue, he adds that even if one reckons that there is a need to have more new banks, it is not the opportune time for it. "More banks will mean more scramble for deposits and in the backdrop of overall liquidity scarcity and high inflation, this will only lead to higher interest rates affecting the productive investment and employment generation," he explains.

However, the officials of Bangladesh Institute of Development Studies (BIDS) do not agree with the views of the opponents. Mustafa K Mujeri, director general of the organisation, says that a majority of our population are not getting any financial assistance from banks now.

Mujeri is hopeful that bringing in new banks will solve this problem. "To achieve that end, the banks should focus more on the rural areas" he says. In his opinion, some of the characteristics of the new banks are capable of bringing unprecedented development in spreading the reach of banks throughout the country. He cites the fact that the new banks are "conditioned to have equal number of branches in the cities and in the rural areas."

Mohiuddin Khan Alamgir, AL lawmaker and a parliamentary standing committee chairman is one of the 13 directors of the oncoming Farmers' Bank Ltd. On a similar note, he mentions that 57 per cent of our population does not get any banking assistance whatsoever. "It is impossible to reach that part of our population without new banks," he says.

However, an alarmingly large part of our population lives below the poverty line. Mirza Azizul Islam, former Adviser of the Caretaker Government, states that one third of our population lives below the poverty line. "And if we slightly raise the standard of poverty line, nearly 50-60 per cent of the people will fall below the poverty line," he says.

At present, we have nearly 50 banks operating in Bangladesh. Economists, including the ones who support the new banks agree that all the banks form cartels and change their interest rates according to their will. As a result, how they will be able to afford banking services remains a question.

There is widespread doubt that the new banks will become an alternative to the existing "syndication" of banks. Debapriya Bhattacharya says, "There is no guarantee that entry of more banks will dismantle the current cartelised behaviour of the existing banks, instill more competition and cut down the interest spread and provide new banking products to the underserved communities particularly in the rural areas."

	Banks play a crucial role in economy. Photo: Amirul Rajiv

Coming back to the most contested issue of approving banks linked with lawmakers and politicians, even the think tanks like Mujeri who is hopeful about the potentials of the new banks acknowledge that the BB decision was influenced by politics. He says, "Even the finance minister has acknowledged that there was political pressure". Nevertheless, he is of the opinion that since the authority has "properly scrutinised all the credentials of the applicants, which is itself a praiseworthy change, there is no need to worry about the future of the banks." He also asserts, "The banks that are given the go-ahead have met the standard imposed by the central bank."

On the other hand, there is no denying that giving permission to banks on the basis of political consideration defies even the standards of a free market economic system. According to noted economist professor MM Akash, "A bank is an economic institution and it must be rationalised on the basis of economic logic." About the question of bringing more people under the banking service, Professor Akash says that more emphasis should be given to make "the existing banks more efficient and their branches should be spread out throughout the country. And Bangladesh Bank must look after them according to the banking laws."

Akash also deems the talks about the new banks meeting the regulations imposed by the central bank irrelevant. "There is, simply no need for new banks now," he says. Moreover, since banks are large institutions capable of having command over the economy, Akash holds that it is "better to have them under mixed ownership with the predominance of government shares."

The crucial roles banks play in an economy is undeniable. The major role of the banks is to collect small and discrete savings from the households as well as from the public and private corporate sectors and make credits available for small and large investments, says Debapriya Bhattacharya. "Banks also finance working capital demands, overseas transactions, and consumption needs. Indeed, the strength of the banking infrastructure greatly determines the enabling economic environment of the country and thus the ability to support sustainable growth" he concludes.

Considering these, exerting political influence on the decisions of the central bank defies common sense. Moreover, the institutional integrity of our central bank has become dubious. Ignoring the critics, the Deputy Governor of BB Sitangshu Kumar Sur Chowdhury told reporters that the new banks were approved after “proper evaluation” independent of any political consideration. Debapriya Bhattacharya points out how "the BB at first expressed its reluctance to provide license to new banks, but later enthusiastically argued in favour of it." He adds that the central bank has "failed to work as a dependable safeguard against the political pressure that may undercut the best interest of the banking sector." He also anticipates that the new banks will trigger a rise in interest rate and cause "cut throat fight for liquidity."

Naturally, the new financial institutions will try to be profitable. More importantly, if they want to serve their clients, the new banks have to be profitable. Bhattacharya thinks that it is inevitable that to sustain high profits, the banks may go to more risky ventures including investment in the capital market. He also does not exclude the possibility of these banks bending the banking rules to earn more. "We shall see soon a secondary market of the new banks emerging where the shares of these institutions will be sold at a premium to those who have the money, but not the strongest connection to get a license," he says.

While there is doubt that these new banks will be doing any good to the ailing economy, no one doubts that these financial institutions will need to recruit qualified personnel in order to run. "In the finance sector, particularly in the banking sector, there is a scarcity of skilled manpower. The new banks will only worsen that problem," says Mirza Azizul Islam.

What the future holds for these new banks and our economy remains to be seen.