We need to protect depositors from bank boardroom misuse

In recent times, we have had a barrage of reports showing how, during the tenure of the Awami League regime, politically influential or affiliated directors in private banks abused their power to misappropriate general depositors' savings through illegal or unethical practices. These include sanctioning loans without due diligence, waiving or writing off loans and their interest, extending or rescheduling loans without reasonable grounds, making bank investments without proper feasibility studies, etc. Such poor governance resulted in an unprecedented misappropriation of depositors' money over the last decade or so.

While most malpractices in the banking sector stem from inadequate supervision and poor accountability practices by the central bank, the loopholes within the existing legal framework on banking governance also play a significant role. Corrupt individuals and their allies managed to legalise their wrongful actions by using some flawed provisions of the Bank Company Act, 1991 (amended up to 2023)—the primary legislation governing the banking sector. To identify the weaknesses in the legal provisions regarding accountability and transparency, it is crucial to understand the functions and powers of a bank's board of directors.

Legally, a board of directors is the highest decision-making body in a bank, responsible for formulating and implementing policies, risk management, internal controls, internal audits, and compliance. In short, the board oversees all business and administrative actions of a bank. So having a well-balanced and accountable board is paramount, especially as a bank holds and manages the funds of depositors. However, malpractice in the banking sector often begins when influential individuals take control of the board. The question is, does the current banking legislation prevent a bank from falling under the control of vested interests? The answer is somewhat affirmative.

Read more

The nine lives of a corrupt public servant

Section 14Ka of the Act states that the shares of a bank cannot be accumulated in the hands of an individual, particular family, or company—and it bars them from acquiring more than 10 percent of shares in a banking company. Moreover, Section 15 restricts the number of directors from one family to three at a time, while Section 23 allows two additional directors from the same family's affiliated or controlled company or institution.

But since a bank, being a public limited company, must have at least three members on its board, including at least two independent directors, it is legally possible for five out of seven members on a board to be from a single family or its affiliated companies, allowing it to control the board. Such a concentration of control within a family raises ethical and legal concerns. For instance, appointing family members and associates to key positions in a bank could lead to conflicts of interest, where personal interests might overshadow depositor interests. Moreover, favouritism and incompetence may lead to poor compliance and thereby increase the risk of financial mismanagement and misappropriation.

Furthermore, according to an amendment to the Act passed on June 21, 2023, an individual can serve as a director for twelve consecutive years and may be reappointed after a three-year break. Such a lengthy tenure can allow directors to entrench themselves and misuse their position for personal gain rather than safeguarding depositor interests. All these vague and legally tenuous provisions of the Bank Company Act can open avenues for vested interests to amass control over banks.

Read more

Bangladesh’s quest for a corruption-free tomorrow

Beyond the formation of the board, the most critical issue is ensuring transparency and accountability among directors. The Act mandates that directors, managing directors or chief executives, and senior management officials disclose the "name, address, and other details of their commercial, financial, agricultural, industrial, and other businesses," along with details of family business interests, to the board annually. However, Section 18 does not require this disclosure to be submitted to Bangladesh Bank, creating a transparency loophole. A board plagued by vested interests will naturally like to shield its members. Additionally, the Act requires directors and members of senior management to notify the board if they have a relationship with anyone bound or about to be bound in a significant contract with the bank. While this provision initially appears well-suited to promote transparency, the vague term "significant contract" leaves room for misinterpretation and manipulation.

Beyond the formations and functions of bank management, the 2023 amendment to the Act also raised concerns by granting substantial concessions to loan-defaulting companies. It stipulates that if one company within a group defaults, other companies within the same group or linked to the same individuals won't be classified as defaulters. This will also not affect their ability to secure new loans. Economists believe these changes risk increasing intentional loan defaults, further worsening bank governance issues.

What becomes clear from the above discussion is that existing legal provisions can, and do, allow for malpractice within banks. To protect general depositors' interests and restore good governance in the sector, we must reform the legal framework for board formation and its transparency.

Farhan Masuq is lecturer of law at Bangladesh University of Professionals (BUP).

Khushnuma Khan is a barrister-at-law.

Views expressed in this article are the authors' own. 

Follow The Daily Star Opinion on Facebook for the latest opinions, commentaries and analyses by experts and professionals. To contribute your article or letter to The Daily Star Opinion, see our guidelines for submission.