Extension of bank directors’ tenure: A huge blow to banking sector

Allowing directors to stay on for 12 years will deal a huge blow to the financial health of banks, which are already facing several crises, including a lack of corporate governance in recent years, say experts.

"They will have more control over the banks' management," said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.

The move to extend the bank director's tenure by three years should have been discussed with the agencies concerned such as Bangladesh Bank, the parliamentary standing committee on the finance ministry, the cabinet division and so on.

The Bank Company (Amendment) Bill 2023 was passed in the parliament on June 21, with the provision to extend the tenure of bank directors to 12 years added at the last minute.

The version of the bill that was placed in the parliament by Finance Minister AHM Mustafa Kamal on June 8 did not seek to amend the tenure of the board members. Neither did the parliamentary standing committee on the finance ministry make any such suggestion.

The provision was included after ruling party MP Ahsanul Huq Titu made the proposal, and the amended bill was passed by voice vote.

"It is purely an internal con job done by the directors," said Mansur, also a former chairman of Brac Bank.

The cabinet, Bangladesh Bank and the finance minister were not involved in taking the decision, but the directors eventually managed the majority of the parliament members' vote, he said.

"I have never seen such type of things take place in Bangladesh," said Mansur, also a former economist of the IMF.

There is no democratic accountability in the country, which is why the bill has been passed without any due diligence, said Debapriya Bhattacharya, a distinguished fellow at the Centre for Policy Dialogue.

"And the lack of accountability has been just exposed nakedly just before the national election. The decision process is just rare," he said.

The Banking Companies Act 1991 stated a director could hold his/her directorship for six years in a row, but the provision was withdrawn in 1995, meaning that there was no bar on how many years a director could hold his position in a bank board.

In 1997, the government again amended the act, in which the bank directors were allowed to stay on for six years. But the provision was removed in 2003.

In 2013, the act was amended, allowing a director to hold the bank directorship for six years, and the tenure was subsequently extended to nine years in 2018. And finally, the tenure has been extended to 12 years this time.

"It seems that the directors of the bank have just captured the state power. The directors are the de facto defaulters and they usually give donations to the government on several occasions," Bhattacharya said.

A number of central bank probes revealed that a good number of directors were involved in siphoning a large amount of depositors' money from both state and private banks.

The government is now under a programme of the International Monetary Fund, which stipulates that the non-performing loans in the banking sector will have to be brought down.

"This has given an indication of the gravity of the power held by the bank directors."

Allowing the directors to stay on for 12 years will weaken banks' corporate governance and ultimately increase the defaulted loans further, Bhattacharya said.

In the first three months of 2023, banks' defaulted loans increased by Tk 10,964 crore to take the total to Tk 131,621 crore, up 16 percent from a year earlier, data from the Bangladesh Bank showed.

"The government should have protected the interest of the depositors, but it has served the directors. This means they are the real ruler of the country as they have gathered vast power," Bhattacharya said.

The bank management's freedom will be squeezed more in the coming days due to the initiative, said Salehuddin Ahmed, a former BB governor.

New leadership is highly important for improving an organisation, but the country's banking sector will be deprived of this due to the amendment.

"If a director can hold his/her position for 12 years in a row, how will new leadership be created in the banking sector?"