Fixing the mess in our banking sector

When we look at Bangladesh's recent economic performance broadly, we see that it has done quite well having maintained a GDP growth rate of 7-plus percent from 2016 to 2018. This is particularly impressive considering Bangladesh was among only five countries out of 45 least developed countries that had managed to do so in the year 2017, according to the United Nations Conference on Trade and Development—making the preservation of such growth for three straight years, and possibly longer going into the future if we are to believe the expectations of most forecasters, even more impressive.

Another accomplishment that is eye-catching is the growth of its overall size of the economy. According to the World Economic League Table (WELT) 2019 produced by London-based Centre for Economics and Business Research, Bangladesh is set to become the 24th biggest economy in the year 2032, climbing up from its current position of 41st.

In what seems to be almost unanimously the case with the majority of politicians and governments around the world, ours too has claimed a large part (if not all) of the credit for these positive aspects of our performance. While at the same time, just as naturally doing their best to shirk responsibility for the downsides—the most glaring of which is the disastrous performance of our banking sector over the past years, and thus its resulting fragility and lack of good governance at present.

Some within the government (or who were previously a part of it) have, in fact, gone so far as to allege that the banking sector is doing “just fine”, and that those who see or say otherwise are all “ignorant”. While one could only wish that was true, the overwhelming evidence suggesting otherwise makes this “denial syndrome” extremely unhelpful and indeed dangerous to some extent, first and foremost, as it indicates that those with the most influence to make change have no intention of doing so.

This evidence that I speak of includes the fact that defaulted loans grew by about 176.5 percent between 2009 and 2016—and beyond ever since. And that government handouts to “zombie banks”—which most likely would have died without government bailouts—amounted to more than Tk 13,500 crore between 2011 and 2018 despite the fact that these banks were riddled with mismanagement and corruption, and seemingly still are, in spite of the never-ending bailout money taken directly out of taxpayers' pockets being handed to them.

By bailing out losers, what the government has essentially done is destroy any semblance of a market economy that we may have had—as in a free market, banks making boneheaded business decisions would get wiped out, not bailed out—and the market's ability to determine prices on anything other than whimsical government decisions and interventions at the behest of special interests. In this particular context, the destruction of the free market has been wrought through the “socialisation” and transfer of banks' losses onto ordinary people for them to bear, through the machinations of government and its institutions.

But the fact that repeatedly bailing banks out is a disastrous practice that eventually snowballs into greater disasters economically and socially speaking, should never have come as a surprise to anyone in the first place. Plenty of countries had tried it before, all with horrendous consequences. And thus to even consider otherwise is simply illogical and idiotic. And so the promotion of the idea that bailouts would or could be beneficial for the people and the general economy can either be classified as propaganda with no substance, or the result of economic and financial illiteracy. After all, the protests raging across France and other European countries, the protest vote in the UK (i.e., in support of Brexit) and the one in the US which brought Donald Trump to power (over Hillary Clinton who was commonly referred to as the “Goldman Sachs candidate” within financial circles), were all primarily down to the discontent of people with their government's decision to unjustifiably bail out zombie banks for years at their expense.

Yet, our government not only decided to ignore such obvious examples, but also the alarms raised by economists, as well as the time-tested concept of economic “moral hazard”. Unfortunately, ignoring the latter has only turned our own financial sector into a further test-case where the concept of economic moral hazard has held true; as despite the endless bailouts, defaulted loans in the country's banking sector once more soared by 20.23 percent in the first six months of last year—by Tk 89,340 crore. With that figure actually rising to Tk 1,38,000 crore when written-off loans of around Tk 50,000 crore are added.

Moreover, as per the central bank's own data, 57 scheduled banks rescheduled loans of Tk 19,120 crore in 2017, while classified loans (when conservatively calculated) amounted to 10.41 percent of banks' total outstanding loans at the end of June 2018. Classified loans in just six state-owned commercial banks—Sonali, Agrani, Janata, Rupali, BASIC and Bangladesh Development Bank Limited—increased to Tk 43,853 crore at the end of June 2018 from 37,326 crore on December 31, 2017—which remarkably means that 28.24 percent of all their disbursed loans are now classified loans.

The number one reason why the banking sector has been struggling to address this culture of loan defaults almost entirely by big borrowers is, as former Bangladesh Bank governor Salehuddin Ahmed explained, that “People involved with the loan nonpayment are very influential and linked with other influential quarters as well as politics.” This was further evidenced by the non-prosecution of politically appointed bank high-ups even when the Bangladesh Bank's own investigations found them guilty of being at the centre of financial corruption and scams. Then there were countless interventions by government ministries in the regulatory operations of the central bank to prevent it from implementing measures that would go against the interest of certain groups or a group of individuals, even though they were clearly in the public interest.

And the reason why this problem is much more significant in reality than what it seems on the surface, is because we now live in an overly financialised world, where the global economy, as well as the economies of individual countries, are influenced most heavily by the financial sector. One such example of influence can be seen in the financial sector's control over levers that determine whether people can gain access to finance for their businesses, education, housing, etc., or not. These levers, among others, include the interest rate banks afford to savers and the rate at which it lends to borrowers.

When loan defaults by big borrowers skyrocket as it has in our country, that obviously has a massive effect on these rates, typically increasing the cost of borrowing: i) Directly, by raising the rate at which banks lend (which ironically doesn't affect those who don't pay back, i.e. defaulters); and ii) Indirectly, by potentially leading to inflation because of the massive injections of money into circulation via government money printing and bailouts (and spending by defaulters), which sometimes also take a somewhat different shape that often goes unnoticed—it reduces the living standards of everyone other than those who first received the money, i.e. corrupt banks (and defaulters to some extent), as the value of money goes down with each transaction.

Because we have experienced all of these happening in our country over a number of years now, we have witnessed simultaneously an increase in inequality also, as highlighted by various reports published by numerous organisations. After all, when the government bails banks out, what is it essentially doing? First, it is making up for the money lost at the hands of big borrowers (the wealthiest) by taking from everyone else (bottom 99 percent in terms of wealth), i.e. transferring wealth from the 99 percent to the 1 percent. And, second, it is lowering the purchasing power of the newly injected money when it finally arrives at the hands of the 99 percent from the 1 percent, as mentioned above.

The worst case scenario, however, is when all this money, or at least portions of it, are never returned to the domestic economy at all, but are siphoned off abroad by the wealthiest 1 percent for the purpose of “asset hiding”. It is difficult to pin down the specifics of how much money is being hidden and where when it comes to the problem of asset hiding, mainly because of the nature of the global offshore banking industry and other associated industries; a number of international organisations and reports have voiced concerns that huge chunks of money have been siphoned out of Bangladesh to a number of countries abroad.

One such report by the Global Financial Integrity in 2014 revealed that USD 75 billion was lost from our economy because of trade misinvoicing and other unrecorded outflows between 2005 and 2014. And USD 6-9 billion, equalling 9-13 percent of Bangladesh's total trade for that year, was lost through illicit money outflows in 2014 alone. As is usually the case, this leakage almost perfectly coincided with skyrocketing loan defaults in our banks which, as has been seen in many other countries of the world previously, are often the force that drives the former.

The reason why this siphoning of funds—driven somewhat by rising loan defaults and poor regulatory oversight of the financial sector—is exceptionally more damaging to our economy is because, every time someone launders money abroad to any country, they are buying a foreign currency by selling the taka, which results in the debasement of the taka in relation to other currencies. This makes everything for all Bangladeshis more expensive (as with the debasement of the taka, prices of all imported goods get pushed up). There are, of course, many other harmful impacts that result from this. But one could just as easily tie all of them back to the crisis of bad governance and poor regulations in our banking sector, which has sort of become a central hub from which many other forms of corruption that are harming our economy and our country are stemming.

Interestingly, a report by one financial daily at the end of December last year, highlighted “banking”, “balance of payment (BOP)” and “exchange rate crises” as the three major economic woes that Bangladesh faced last year, which “eclipsed” its economic achievements. According to Dr Zahid Hussain, lead economist of the Dhaka office of the World Bank, the BOP deficit was created directly by capital flight. If we go back to the fact that capital flight itself is, to some extent, driven by the many festering problems in our banking sector, one could conclude that the three biggest economic problems that we, as a nation, are facing are really the result of one—our troubled banking sector.

Thus, it becomes obvious that the state of our banking sector and where it is heading is the biggest economic problem that we must address today. And that is a sad reality because it could just have easily been the mirror opposite, had policymakers, regulators and others within the government prioritised the wellbeing of our nation, its population, and the economy, over the interest of a handful of corrupt individuals and special interests.

There is, however, another way of looking at it as things stand. If the banking sector is the biggest problem for our economy, and if that problem is a direct result of poor governance and lack of regulatory oversight across the many spectrums of our government and its various institutions, then with good governance and proper regulatory oversight, the banking sector would cease to be such a burden on the rest of the economy. And that could give our economy the kind of impetus that it needs to move ahead, grow and perform exceptionally well by any global standards, which is by no means out of our reach yet.

As for how the government can fix this mess that is the product of its own creation, there have been plenty of solutions that have been expressed, explained and published by experts, media, academics, etc. What is needed is for the government to acknowledge the reality, to get out of believing its own propaganda which it has been repeating for years now, and to work with others to implement the solutions that have already been offered to it.

But regardless of what the government decides, what is equally important for them to understand is what would happen if they continue to provide political patronage to corruption in our banking sector, already reeling from past scams. Fortunately, for the government, perhaps, it seems we are now also living in times when examples of what consequences await those who fail to address the problems caused by the neoliberal economic policies of the past several decades—with corrupt banking right at the heart of it—adopted by the world, are popping up in one corner of the world after another, in county after country. With that in mind, one could only hope that going into the future, we'd prove to be a nation that, in comparison to them, is a much faster learner. And by doing that, hopefully, prevent non-performing loans from rising even by “a penny”, as the new finance minister, Mustafa Kamal, has promised.

Eresh Omar Jamal is a member of the editorial team at The Daily Star. His Twitter handle is: @EreshOmarJamal.