Corporate Governance:

Corporate governance is the system of rules, practices and processes by

which a company is directed and controlled. Corporate governance
essentially involves balancing the interests of a company's
many stakeholders, such as shareholders, management, customers,
suppliers, financiers, government and the community. Since corporate
governance also provides the framework for attaining a company's
objectives, it encompasses practically every sphere of management, from
action plans and internal controls to performance measurement and
corporate disclosure.

Reference:
https://www.investopedia.com/terms/c/corporategovernance.asp

Five pillars of Good Governance

There must be an effective body responsible for governance that is

separate and independent of management to promote these five basic
tenets of Corporate Governance. These are namely:
1. Accountability leadership that must be ready to account,
2. Efficiency and effectiveness hence leadership for results and not
poked down in process,
3. Probity and integrity or Integrity and Fairness hence leadership that
is honest, faithful and diligent; obedient to the cannons of Natural Law of
Justice and Rule of Law,

4. Responsibility hence leadership that is capable, representative and

conscious of its obligations,
5. Transparent and open leadership Leaders should accurately and
timely disclosure of information relating to all economic and other
activities of the corporation; be true stewards!
Reference: http://gabriellubale.com/what-are-the-components-of-a-
good-corporate-governance-process-for-chamassaccos-and-micro-
finance-institutions/

Challenges to banks' good governance

BANGLADESH Bank is committed to establishing good governance

practices in banks and financial institutions besides fulfilling its core
objectives like employment maximisation and price stability in the country.

Corporate governance is such a precondition that affects the financial

soundness indicators of each institution. The quality of governance can
affect the financial soundness indicators of banks such as asset quality and
capital adequacy ratio. The ambiguity in either regulatory measures or the
corporate management level can distort the smooth functioning of the
financial intermediation process. Corporate governance failure can happen
when one or more banks are devoid of transparency, accountability and
oversight of their own managerial practices.

Moreover, when corporate governance structure is ambiguous and not very

well developed, the ultimate accountability to the stakeholders can remain
with the regulators. Sometimes, the amount of non-performing loan (NPL)
can rise due to deterioration of industry-wide moral hazard and so, if
regulators are unable to effectively curtail them, regulatory governance
failure can be made responsible. The challenge of dealing with NPL
includes a lack of proper legal procedures to recover bad loans and a
tendency to reschedule or restructure those loans.

In recent times, the structure and style of corporate governance have

changed overall. If we look at corporate governance structures across the
globe, we may find that families constitute majority of the market
capitalisation in most of the countries. With family ownership, rational
succession plans are difficult to implement as family members may not be
qualified to assume managerial responsibilities, or they may not be
interested in carrying on family business.

In my understanding, it is the most significant problem of corporate

governance in Bangladesh. Although our policies do not support this, it can
happen sometimes indirectly due to opaqueness in the policies itself. This
kind of structure may hinder the good governance practices since the
exposures of connected persons can serve their personal benefits.

The second most problem of corporate governance is the lack of

knowledge about monitoring new products, or insufficient attention to their
risk characteristics. Moreover, the promotion policy in commercial banks
(for example performance in line with deposit collection targets, etc) may
not be coordinated with, or may even contradict with broader objectives of
the bank. In regard to accountability and transparency, accounting
standards and disclosures are very important.

A market for corporate control can play an important monitoring role, as

poorly managed companies can become merger/acquisition targets. In
Bangladesh, there seems to be no market for corporate control, as
merger/acquisition of either publicly-traded or privately-held companies is
rare. Moreover, independent directors do not act as an advocate for
minority shareholders or as a source of innovative ideas as they are
thought to be. It is assumed that due to a lack of shareholders' activities,
corporate governance cannot be firmly established. There is also a lack of
independence of auditors which is linked with "lemon problem" -- a problem
of information asymmetry. In addition, due to managers' appetite to take
excessive risks to earn more profits/incentives, banks' health can be
deteriorated further. This can be solved by introducing employee stock
option plan, or by introducing multi-year remuneration programmes, where
compensation over the years is tied to long-term outcomes, not the short-
term ones only.

It has been observed that board members and senior management, who
may be appointed by the government, may not have full discretion to carry
out their responsibilities properly. It is my opinion that international
guidance should pay more attention to the issue of domination of the board
by a single individual or faction, and measures that banks or banking
supervisors could put in place to address this problem. Domination of the
board by the chief executive officer is a common problem, but there is also
reverse domination -- individual board members interfering in specific
decisions of senior management or even lower levels of management.
There is also the problem of irreconcilable conflict between the board
chairman (or individual board members) and the CEO that is not addressed
adequately so far. It not only could deteriorate corporate governance of the
bank but also could signpost unhealthy example to other banks.

Bangladesh Bank has been pursuing the best corporate governance

framework for the banking system. The first principle suggested by the
Basel Committee on Banking Supervision on corporate governance
focuses on the board's overall responsibilities. However, the concept of
risk appetite is still not very well developed in this regard, and board
members may have difficulty being actively involved in its preparation,
approval, and communication throughout the bank. Also, in some banks
that have a more traditional, hierarchical structure, it may be difficult to
implement a policy of escalating problems or ethical lapses to the attention
of the board, without fear of reprisal. The second principle is about the
board's qualifications and compositions. Initial and ongoing training of
board members in their duties and responsibilities is very important, but in
some banks it may be difficult to sustain that kind of training because of
time constraints and reluctance of certain board members to attend.

The principle no. 4, 5, 6 and 8 focus on senior management, governance of

group structures, risk management function and risk communication
respectively in which we do not find any visible challenge to implement.
Considering the principle no. 7 which is named as risk identification,
monitoring and controlling, we have observed that in some banks, there are
challenges in accumulating a sufficient dataset to measure expected losses
and unexpected losses in the credit portfolio, as well as in operational risk
management and liquidity management. These practices are just getting
started in many banks, and historical data are often not available with
sufficient depth and quality. In regard to principle no. 9 that is referred to
compliance, it is assumed that in some banks, there may not be an
understanding of the difference in roles between compliance and internal
audit.
The second line of defence functions of risk management and compliance
are well-understood, but the third line of defence role of internal audit in
reviewing the adequacy of risk management and compliance may not seem
sufficiently distinct.

In regard to the principle related to compensation (principle no. 11), the

legal basis for multi-year remuneration payout schedules, claw back (the
recovery of money already expensed) provisions for unsatisfactory
outcomes, and vesting of deferred compensation have not been sufficiently
developed in Bangladesh to better align compensation with risk-taking.

Regarding principle no. 12 on disclosure and transparency, some of the

matters such as compensation principles and amounts are kept highly
confidential to depositors and market participants. Finally, principle no. 13
on the role of supervisors, we do not find any challenge to implement,
except in the case of state-owned commercial banks where Bangladesh
Bank cannot alter the composition of the board and senior management, or
in requiring corrective action.

In summary, Bangladesh Bank has been trying to establish good corporate

governance standards in the banking system but the efficacy of these
mechanisms will depend on the overall attitude of the stakeholders.

Writer: SK Sur Chowdhury, Deputy Governor, Bangladesh bank

Reference: http://www.thedailystar.net/business/banking/challenges-
banks-good-governance-201367

Banking sector: Regulations, compliance and good governance

The global financial and economic crisis started in 2007 as an aftermath of

the housing sector bubble coupled with aggressive lending practices in the
US sub-prime mortgage market and lax regulation of the financial sector.
The financial crisis, like a contagious disease, spread to the real sector of
the US economy and affected both financial and real sectors of the world,
making the crisis a global and very serious challenge for economic
activities.
The root cause of global recession can be traced back to the
mismanagement of banks and financial institutions. Despite all the
measures taken by different countries, with the US taking the lead, full
recovery has not yet been forthcoming. The year 2015 will be a challenging
one. Small economies like Bangladesh are by no means invulnerable to
fallouts from global downturns or negative spill over of policies of large
economies and therefore have a strong stake in global stability and
economic growth. In forums such as the G-20, countries like Bangladesh
need to argue forcefully for the same priority in stability as recovery, as well
as for stability action agenda going beyond addressing symptoms (i.e.
lapses in risk management, inadequacies of regulation and supervision) to
addressing underlying causes (i.e. lax policies, non-compliance of
prudential and management norms, poor financial reporting, unbridled
liquidity expansion that incubate bubbles.)
So what are the implications of the Bangladesh economy minimising
external shocks and internal shocks? This paper will mainly address the
several challenges faced by the banking sector in creating internal shocks
in the economy. Recently, the Hallmark and Bismillah Group financial
scams, which started mainly at state-owned commercial banks, have
demonstrated cracks in the management of these banks. From the Board
of Directors to the management group to the lower level officials, these
banks have not shown any sign of good governance, transparency and
accountability. The disturbing fact is that these irregularities have
permeated to private commercial banks as well.
There are several state-owned and private banks that have slightly different
governing structures but follow the operational guidelines of Bangladesh
Bank in terms of prudential and management norms. The norms provided
by Bangladesh Bank are fairly well formulated and follow international
standards. The International Accounting Services Board (IASB) under the
Bank for International Settlements (BIS) in Basel, Switzerland, has
provided three major norms namely Basel I, Basel II and Basel III. Basel I
of 1988 required that banks and financial institutions have sufficient capital
adequacy, which was originally 8% of risk weighted assets (RWA). Later
on, it was raised to 10% for banks, including those in Bangladesh. There
are some banks in Bangladesh whose required capital adequacy falls short
of the norm. Basel I set up a mechanical, non-market oriented
measurement of capital adequacy which could not take care of
fundamental risks, e.g. operational risk and market risk. Basel II,
introduced in 2004, took care of the different types of risk for financial
intermediaries (i.e. banks) as well as the supervisory review process for the
management of banks. The global community realised the inadequacies of
Basel I and Basel II during the recent global financial crisis of 2007. Basel
III was introduced in 2013 and is supposed to be completed in 2020. The
major aspects of Basel III are: first, to strengthen the capital framework of
banks and to give more emphasis on equity capital (Tier-1, core capital);
second, to ensure global liquidity; third, to highlight systematic risks as well
as mitigation measures that address the risks. Two major aspects
regarding liquidity are Liquidity Coverage Ratio (LCR) and Net Stable
Funding Ratio (NSFR). Bangladesh bank has recently issued a circular to
implement Basel-III liquidity ratios. Besides the three international Basel
norms discussed above, banks follow other guidelines prescribed in the
various Acts and regulations in their respective countries.
Financial reporting by banks is very important in ensuring the interest of
depositors, as well as that of the clients. I shall now highlight the aspects
that are related to the compliance of different rules, regulations and norms,
prescribed for banks. In Bangladesh, as pointed out earlier, the regulatory
requirements of banks follow international standards. Besides these, the
Bank Company Act provides guidelines for the preparation of reports,
including audit reports. On top of that, state-owned commercial banks and
specialised banks, like Krishi Bank (RAKAB), follow the requirements laid
down in the respective Acts through which they were established. The
Registrar of the Joint Stock Company (RJSC) also has certain rules for
entities registered under the Company Act and the Societies Registration
Act. Similarly, Bangladesh Security Exchange Commission (BSEC) has laid
down rules for companies to prepare their financial reports. On the whole,
requirements for the financial reports of banks, non-bank financial
institutions (regulated under the Financial Institution Act) and various
companies are quite satisfactory in Bangladesh. The disturbing part is that
these requirements are not properly complied with by various institutions.
This means that the implementation (enforcement and compliance) of rules
and regulations is the Achilles Heel. Despite supervision and monitoring
by the regulatory bodies such as Bangladesh Bank and BSEC, serious
mismanagement and malpractices have occurred in the banking sector as
well as in the capital market. The disclosure of banks in their financial
reports is prepared by following International Accounting Standards-30
(IAS-30). This has been replaced by International Financial Reporting
Standards (IFRS-7). According to this format the financial disclosure is
more logical, which means that banks now face higher risk in the
investment and management of capital. If the required standard is followed
then depositors and clients of the bank and the general people will not face
any loss. Besides IAS-30, there are also IAS-32, IAS-39 and IFRS -9,
which are prescribed for the management, supervision, and monitoring of
financial intermediaries. The government of Bangladesh took an initiative in
2001 to promulgate the Financial Reporting Act, which hitherto has not
been done. In 2013, a draft was circulated to the main stakeholders, one of
which is the Institute of Chartered Accountants in Bangladesh (ICAB) and
the other the Institute of Cost and Management Accountant in Bangladesh
(ICMAB). These two institutions have opposing views regarding the
proposed FRS Act and the proposition that the constitutions of the
Financial Reporting Council (FRC) be headed by the Governor of
Bangladesh Bank. ICAB opposes the establishment of the FRC, while
ICMAB supports its establishment. ICAB opposes on the ground that it is a
self-regulatory professional body which is competent enough to ensure
proper financial reporting. But a very strong point is made by others that a
membership organisation like ICAB cannot perform the job of an
independent, accountable and autonomous regulatory council like the
proposed FRC.

It must be pointed out that a balance must be made between the regulation
and independence of a bank. This means that banks should neither be
overregulated nor should they be left alone to enjoy complete freedom,
which often results in banking disasters. This point has been very aptly
articulated by Jean Tirole, the Nobel Prize winner of Economics in a book
jointly written with his colleagues. It is important to keep in mind what
financial regulation is meant to achieve. The most important objective is to
protect depositors, investors, the general public and the real economy (real
goods and services) as a whole. The second rationale for regulation is
to minimise the domino effect of the systematic risks of the financial
institutions whichs destroy the foundation of
economic activities resulting in loss of real output, lower growth, higher
unemployment and reduction of human welfare.
Good governance in the banking sector is an important agenda of our
country, especially in the present context of the crisis in the banking sector.
Transparency and accountability have recently become an issue of greater
concern with revitalised importance in the context of public and private
responsibility of managing banks. The International Monetary Fund (IMF)
has defined transparency as an environment in which the objectives of
policy, its legal, institutional and economic framework, policy decisions and
their rationale, data and information related to monetary and financial
policies, and in terms of agencies' accountability, are provided to the
public on an understandable, accessible and timely basis (IMF-1999).
Transparency in government operations is an important pre-condition for
macro-economic fiscal sustainability good governance, and overall fiscal
discipline. Accountability, in the words of Lessinger (1970), is the product
of a process which means that an agent, public or private, entering into a
contractual agreement to perform a service will be held answerable to
perform according to agreed upon terms, within an established time
period and with stipulated use of resources and performance standard .
Transparency is necessary to ensure accountability among the major group
of participants in financial markets: borrowers and lenders; issuers and
investors; and national authorities and international financial institutions.
Transparency and accountability are mutually reinforcing. Transparency
enhances accountability by facilitating monitoring, and accountability
enhances transparency by providing an incentive for agents to ensure
that the reasons for their actions are properly disseminated and
understood. A perfect example is the Hallmark scandal of the state-owned
Sonali Bank which occurred due to the lack of both transparency and
accountability. Both the borrowers and the officials colluded in a non-
transparent manner and siphoned off huge amounts of public money. The
people who were caught have not yet been subjected to administrative and
legal actions, in fact they got perverse incentives and the honest and
dedicated people working in the same bank and elsewhere are pushed
back into inefficiency. As the saying goes, Bad money drives away the
good money.
The transparency of financial statements of banks is secured through full
disclosure and by providing fair presentation of useful information
necessary for making economic decisions to a wide range of users. In the
context of public disclosures, financial statements should be easy for users
to interpret. Whereas more information is better than less, the provision of
information is costly. Therefore the net benefits of providing more
transparency should be carefully evaluated by standard setters. The
adoption of internationally accepted financial reporting standards is
necessary to facilitate transparency and contribute to proper interpretation
of financial statements. In the context of fair presentation, no disclosure is
probably better than disclosure of misleading information. Left to
themselves, markets cannot generate a sufficient level of disclosure. Here
is the vital role of the accountants, as the bulk portion of useful financial
information used by the market participants are provided by the accounting
information systems, where the preparers (the employed accountants)
provide information which is authenticated by external accountants on the
basis of International Accounting Standards (IAS) and International
Standards of Auditing (ISA). An accountant should not depend on numbers
only, one should engage one's own logic and judgment to analyse a set of
numbers.
With the view of strengthening good governance in the financial sector,
especially in the banking sector, Bangladesh Bank embarked on several
financial sector reforms over the years. A large number of home grown
reforms have already been taken and some are underway. Bangladesh
Bank attempted to strengthen the legal framework of the financial sector,
bring in dynamism, extend autonomy to the central bank, combat money
laundering offences, and stop financing for terrorism. There are several
other prudential norms already discussed in the previous section in relation
to the Basel Guidelines and the guidelines of various Acts of Bangladesh.
One important aspect is the management norms, which concern the fit and
proper test for CEOs and directors of a bank, restrictions on the
composition and functions of the Board of Directors. Banks have been
directed by Bangladesh Bank to include one independent director in the
Board of Directors. Audit Committees for all banks were mandated with
clear guidelines, and TORs and an early warning system (EWS) were
introduced. The Core Risk Management Guidelines on five major risks
were introduced quite some time back and credit risk assessment by
External Credit Assessment Institutions (ECAI) have been recommended
for all commercial banks. However, in recent times we have seen that
many of these management norms are not followed by banks. There are
several privately owned banks where a number of family members are on
the Board of Directors, which is contrary to the notion of good corporate
governance. Therefore one of the main challenges for the banking sector is
to ensure good corporate governance which will benefit the depositors,
borrowers and investors; expand potential markets; broaden ownership;
create alternative financing options; accelerate growth; increase
employment and help reduce poverty in Bangladesh.
To balance the objectives of good governance and ensure compliance of
regulations, three major steps are necessary: (a) a strong and independent
central bank with more focus on core banking issues, (b) a well thought out
set of prudential and management norms of the central bank that are not
subject to frequent changes due to external political/administrative
pressure, and (c) a system of prompt corrective actions for management of
crises and for legal/administrative actions against persons responsible for
crises in a particular bank or in the banking 'system' as a whole.

Writer: Dr. Salehuddin Ahmed, Former Governor of Bangladesh Bank

and currently Professor, School of Business of BRAC University.

Reference: http://www.thedailystar.net/supplements/24th-anniversary-
the-daily-star-part-1/banking-sector-regulations-compliance-and-good

Good governance key to higher economic growth

Governance in the financial sector is crucial to steering the economy
towards a higher growth trajectory in the long-term, said a top central
banker.
Shitangshu Kumar Sur Chowdhury, deputy governor of Bangladesh Bank,
said a low level of development in a country is possible even if institutions
are weak.
But for the long term, corporate governance of the financial sector
becomes a key element for growth.
The economy is well on track to achieving the middle-income country
status by 2021, said Chowdhury. He has been with Bangladesh Bank for
more than 30 years now, having a wealth of experience in key central
banking areas including banking regulation and policy, financial institutions
and markets, agricultural credit, forex reserve and treasury management.
He lauded the agriculture sector, small and medium enterprises and retail
initiatives as the engine of the growth. Our growth, therefore, is inclusive in
nature.
The deputy governor reflected on the deteriorating portfolio of the state
banks and portfolio problems of the private banks that resulted in non-
performing loans (NPL) of an average 10 percent in the past couple of
years.

The issue of NPL is not a new phenomenon in Bangladesh. In fact, the

country has been carrying the NPL legacy from the very early stages of its
independence, he said.
We began with a financial sector regime with fixed interest rates and
directed credit. This is not to underplay the gravity of the issue. True, there
are failures on the part of the banks to contain and lower the NPL level, but
it would be unwise to take away the focus from many other external factors
associated with it.
The inability to pay instalments due to project failure, weak infrastructure,
delay in receiving export proceeds, lingering money suits against
borrowers, political instability, unexpected financial downturn, and the
culture of borrowers' unwillingness to repay also contributed to the NPL,
according to the deputy governor.
The central bank is working on two broad perspectives to establish an
enabling environment for proper management of NPLs. It has put in place
conducive laws and regulation and beefed up supervision, monitoring and
inspection.
We are now considering the introduction of a movable collateral registry
and widening the availability and scope of credit information. While
significant progress has been made in dealing with NPLs, we firmly believe
that a lot more can be done by exploring new and innovative approaches.

Many analysts think the current monetary policy is a conservative one. But
Chowdhury said BB thinks the credit growth set for the private sector is
sufficient to accommodate the projected GDP growth of 7.2 percent.
Therefore, Bangladesh Bank's stance on private sector credit is not
conservative at all.

The central bank has set a limit on monetary expansion at 15.5 percent for
2016-17, considering a higher GDP growth of 7.2 percent and moderating
inflation at 5.8 percent. Private sector credit growth has been set at 16.5
percent, much higher than the target of 14.8 percent in the previous fiscal
year.

On declining remittance, the central banker said the slide is not permanent.
We are putting in our best efforts to upgrade our financial sector
architecture, to smoothen the process of remittance flow to beneficiaries.

The central bank has rigorously discussed the matter with the banks and
mobile financial service providers to integrate their structures and facilitate
the easy flow of remittance to beneficiaries at lower costs.
He touched upon the topic of the government forming a sovereign wealth
fund with Bangladesh Bank's foreign currency reserves and finances from
multilateral donor agencies. Bangladesh needs to invest in infrastructural
projects to reduce the huge gap, he said.
Poor infrastructure adversely affects growth-stimulating indicators such as
foreign and domestic investment, the business ecosystem, consumer
confidence, employment generation, and connectivity and trade, he added.

He referred to the World Bank's 'Ease of doing business' ranking where

Bangladesh came in at 174 out of 189 reporting countries in 2016.

The cost of doing business is high in Bangladesh, and most of the

problems can be attributed to the poor state of infrastructure.
Given the huge infrastructure investment need and the low rate of return
on our foreign assets, it would be worthwhile if a certain part of the foreign
assets can be utilised to fund domestic infrastructure projects.
He also said the expansion of microfinance institutions (MFIs) in
Bangladesh has addressed the question of financial inclusion well but
issues of level playing field are yet to be resolved.
Chowdhury said micro-borrowers' graduation from small to medium and
large is not easy, and they are yet to be integrated in the commercial and
specialised banking network.

The borrowing cost for micro-borrowers is much higher compared to clients

of commercial and specialised banks, he said.
Micro deposit and micro insurance are two vital instruments for creating a
level playing field, he added.
Introducing savings instruments will reduce the cost of funds for MFIs and
the initiation of insurance product will provide a risk mitigation tool. Both of
these will help reduce borrowing costs for micro-credit and create a level
playing field for all players.

Reference: http://www.thedailystar.net/business/good-governance-
key-higher-economic-growth-1378897

Growing malignancy in the banking sector

The banking sector has been passing through a turbulent period for some
time. Given that a sound financial sector is key to sustained economic
development, good health of banks is crucial. This is more so when almost
80 percent of financial assets is owned by commercial banks. In FY2017,
the financial sector's share in GDP was 3.41 percent, of which the share of
the banking sector was 2.91 percent. The sector is struggling to recover
from the setbacks of large financial scams in a number of state-owned and
private commercial banks unearthed in recent years. Most indicators reveal
a poor health and lack of discipline in several banks.
In an effort to attract investment, emphasis has all along been put on
lowering bank rates. High lending rate has been attached to high deposit
rate. Bangladesh Bank desires that commercial banks should keep their
interest rate spread within 5 percent. In recent times, there has been a
downward trend of both lending and deposit rates. However, this could not
energise the growth of domestic credit that increased only slightly in March
2017 compared to that of the same period last fiscal year. Though growth
of credit to the private sector was 16.1 percent in March 2017, close to
Bangladesh Bank's target of 16.5 percent, credit to the public sector has
been negative (-9.5 percent). Low demand for bank credit by the public
sector is due to government's reliance on savings certificates. Lower
demand for credit has resulted in high liquidity in the banking system.
As banks are in the process of implementing BASEL III, a global regulatory
guideline to fulfil capital adequacy requirement, effort has to be expedited
to maintain such requirements. Though the overall risk weighted capital
adequacy ratio in the banking sector is slightly higher than the minimum
requirement of 10 percent, this is mainly due to private commercial banks
and foreign banks. State owned banks (SCBs) and development financial
institutions are lagging behind, indicating their vulnerability.
Despite various initiatives taken by the central bank, the amount of non-
performing loan has piled up. Non-performing loans (NPL) in the banking
sector has had a general pattern during the last few years, which shows
that towards December each year, the NPL comes down, but starts to rise
afterwards. This is probably due to banks' effort to clean up their balance
sheets at the end of the year. Though Bangladesh Bank adopted a flexible
loan-rescheduling policy in December 2013, it did not bring the positive
outcome as intended. Increased NPL and lower credit to the domestic
sector have hit the profitability of banks.

The government has been providing generous support to SCBs in order to

improve their balance sheet. In recent years, certain amount has been
earmarked in the national budget to make for the losses of the SCBs. In the
budget of FY2017, the government had allocated a recapitalisation fund
equivalent to Tk. 2,000 crore in order to meet the capital shortage of banks
created by loan defaults. But the default loan situation of the SCBs has not
improved. Such recapitalisation of funds were not much help, since they
could only improve the balance sheet of the ailing banks, but not the overall
loan default situation.
In a resource constraint country, the opportunity cost of such a large
amount is high. This resource could otherwise be utilised for the social
sector where budget allocation falls short of the requirement. If the
recapitalisation fund was used for education and health sectors, it would
improve the share of these sectors' budget in GDP. For example, during
2009 -2016 the actual amount of recapitalisation fund for SCBs was Tk.
11,705 crore. If this amount is added to the health budget, the actual
budget expenditure for health in FY2016 would have increased to 0.84
percent of GDP from the current 0.73 percent.
Recent amendments to the provisions of the Bank Company Act proved to
be another setback. This approves increasing the tenure of directors of a
private bank from the existing six years to nine years, and allows four
members from a single family to be directors in a private bank. In view of
the fact that dominance of family members often means that there is
resistance to adopting corporate regulations, the Banking Companies Act
was amended in 2013 to curb such activities. This amendment had allowed
banks to have a maximum of 20 members on the Board, of whom three
directors must be independent. This allowed a maximum of two family
members to be directors in a private bank. This most recent amendment is
regressive in nature, since it will take a step back from the previous
changes made to the Act. This law will mean that family ownership will
have greater control in banks with the possibility of erosion of corporate
governance.

The other issues include the recent developments in the Islami Bank
Bangladesh Ltd. Following allegations of being involved in terrorist
financing and funding political violence, new management is in charge of
the bank. Amidst major changes in the management of the bank, the
concentration of shares has shifted towards a single owner-borrower. In the
interest of common depositors and borrowers, and in order to improve its
governance, an orderly transition is urgently required.
If the current trend of mammoth NPL, inefficient management and lack of
governance continues, the banking sector can cripple a flourishing
economy instead of contributing towards its advancement. Time is ripe now
to take bold and effective measures.
Writer: Fahmida Khatun, the Executive Director of Centre for Policy
Dialogue (CPD).

Reference: http://www.thedailystar.net/opinion/macro-mirror/growing-
malignancy-the-banking-sector-1412170

Good governance and its role in decision making

GOVERNANCE can be all encompassing and at the same time,

ephemeral. It has increasingly become a topic of interest to those in the
financial sector, driven by high impact and embarrassing failures both at
home and abroad and implications for the wider economy.
With the interest of the wider economy, it could mean many things to many
people. So perhaps we should start with definitions.

There is legalistic governance, as practised in the US, where senior

management has to 'sign in blood'. Should they be caught at breach, they
shall face wrath in courts -- in theory.
The key benefit of this approach is that it is relatively easier to enforce in a
consistent and robust manner. On the other hand, this approach lacks
consideration of an organisation's distinctive features, including culture.
There is also behavioural governance, as practised more commonly in the
EU. This is where the regulators task firms to demonstrate key principles or
behaviours, leaving it up to the firms to design its own approach.
This is, to some degree, the opposite of legalistic governance.
Consequently, when firms take the initiative to design approaches
themselves, the solutions themselves have sustainability built in. However,
they can find it challenging to explain to stakeholders, including the
regulator, why a less common approach is suited, and can have
repercussions.
In my years as the governance and risk subject matter expert at the Bank
of England, we would often have to balance both the above aspects. We
aimed to ensure that we provide incentives for culturally effective
approaches (behavioural), while making clear that there are repercussions
to not meeting the regulatory requirements (legalistic).

Bangladesh Bank's approach matches this too. Essentially, it aims to

encourage firms to not only meet the letter of the law but also, the spirit of
the law.
Simply put, good governance is about having processes to make and
implement decisions in a disciplined yet adaptable way. It is not about
making correct decisions, but about the best possible process for making
those decisions.

When analysing what the differentiating features of resilient firms are, a few
common themes emerge. These are a high degree of personal
accountability at the board and senior management, while being sensitive
to the difference between responsibility and accountability. The board also
demonstrates a robust risk culture and is able to access any information
and provide effective challenges.
The risk culture emphasises the importance of understanding risks,
managing risks, promoting accountability and acting responsibly thereby
protecting the firm and its stakeholders.
Above all, these firms have culturally tailored their approach to governance
-- appreciating that not only do they have to do things better, but also do
better things.

In designing governance solutions for clients, I made sure that the firms
understood the regulatory view (UK and EU) that the regulator is likely to
be somewhat sympathetic of firms that have good governance processes,
but made some sub-optimal decisions compared to firms that have made
good decisions without due process. I also found the governance issues
harder to remedy at the latter types of firms.

This ethos broadly holds true for firms in Bangladesh as well. Good
governance, in the front line, feels like good decision making. As such, it
evidences organisational discipline, consistency of approaches, fairness of
the decisions, efficiency of the processes, and high quality behaviours of
management.
These dimensions hold true, be it governance of modest projects, complex
organisations or within governments. Some organisations argue that these
feelings of fairness and discipline are nice to have, but ultimately, does it
improve the bottom line, and if not, why should they care?

I have been asked this question, more aggressively, by the CEO of one of
the top three US insurers. At that time, I impressed upon him how
intelligently designed governance layers can proactively manage the risk
profile, saving both financial and public embarrassments.
Increasingly, research is showing that good governance provides the
foundation for strong risk management practices and superior operating
performance for organisations and that share prices implicitly assume
sound governance, which leads to severe erosion of value once
governance failures surface.
At a discussion forum with CEOs of all the banks, the topic of governance
came up. They highlighted areas such as the role of independent directors,
the importance of sound governance and risk culture and how to have high
quality and disciplined interaction between boards, management and
divisions.

The banks' role as financial intermediaries has a major bearing on how

efficiently the economy allocates its resources between competing uses.
Put simply, it is the heart of the economy, pumping resources where it is
needed. This has some distinct implications for us.
First, as banks play such a critical role in the economy, when they 'sneeze'
all of us are bound to 'catch a cold' be it directly (such as a collapse
obliterating our savings) or indirectly (such as collapsing funding of critical
development projects). As such, banks in both developed and developing
economies are regulated tightly and, in theory, held to the highest
standards.
We would be wrong, however, to think that these standards are for banks
and related institutions alone. There is an increasing gap between what the
Companies Act requires of all firms (legalistic governance) and what
effective governance means (behavioural).
There is a saying that 'some learn by seeing, and some learn by doing'. As
we target the goal of becoming a middle income country, we cannot rely on
'learn by doing'. Quite frankly, we do not have the time.
Now is the time to have discussion at all levels on what good governance
means for your organisation -- by taking the standards set for banks as
principles and tailoring them to upgrade how decisions are made.

Writer: Sajib Azad, an adviser at Bangladesh Institute of Bank

Management and was previously the enterprise risk director at
Moody's (Europe).

Reference: http://www.thedailystar.net/business/good-governance-
and-its-role-decision-making-211150

Proposed amendments to the Banking Companies Act -- a step backward

Recently, the government has approved a proposal to amend the Banking

Companies Act of 1991. The newly proposed reforms will result in a two-
fold increase in the number of directors -- if the regulatory body relaxes its
limit about the aggregate size of the board without taking into consideration
the equity ownership diffusion pattern of each of the corporate entities in
the financial sector for proportionate representation of non-sponsor
shareholders in it (board) -- from a single family, and extend the tenure of
sponsor share-holding directors by two years.
Since its inception in 1991, the Banking Companies Act has been subject
to various amendments on a regular basis. Such amendments, in
conjunction with the Circular on corporate governance in bank
management (Bangladesh Bank, 2003) have been contributing significantly
to improving corporate governance in the banking sector in Bangladesh.
The guideline on corporate governance brought about some important
changes in the ways private commercial banks were managed in
Bangladesh, including the introduction of independent directors and the
requirement for the establishment of an audit committee. Later, further
amendments were made with regard to the qualifications and experience of
the board of directors and the chair of the audit committee. Also, since
2009, the Bangladesh Bank's initiatives in mainstreaming corporate social
responsibility (CSR) in financial institutions have resulted in significant CSR
investments made by banks in Bangladesh. However, despite such
significant reforms, the state of corporate governance in the banking sector
in Bangladesh failed to reach its desired level. This is predominantly due to
the ownership structure of banking companies in Bangladesh.
The development of corporate governance regulation in any country
requires a very careful consideration of the ownership pattern of the
corporate sector. A widely dispersed ownership pattern, mostly prevalent in
the developed world, is characterised by the classic problem between
managers and shareholders. In the presence of such an ownership
structure, the aim of corporate governance regulations would be to align
the interests of the managers with those of the shareholders. Hence, such
corporate governance models concentrate on careful development of
remuneration packages for the managers, and ensure that the external
auditors benefit from interactions with the audit committee and act in an
independent and professional manner.
A concentrated ownership pattern, on the other hand, is characterised by
what researchers refer to as a 'type II' agency problem between majority
and minority shareholders. In the presence of such ownership structures,
the dominant shareholding family may attempt to expropriate wealth from
the minority shareholders. Such ownership structures are predominantly
prevalent in developing countries, although some developed countries,
such as Japan and Italy have similar structures. The objective of corporate
governance regulations here is to protect the interest of the minority
shareholders and ensure fair distribution of the corporate wealth amongst
all shareholders.
Like many other developing countries, the ownership pattern in the
Bangladesh's corporate sector is deeply rooted in the notion of
traditionalism. Family firms are by far the most dominant form of companies
listed in the stock exchanges in Bangladesh. Such ownership pattern is
even more prominent in the banking sector. However, despite the presence
of such ownership patterns, Bangladesh adopted a governance regime
largely suitable for a corporate sector with dispersed ownership patterns.
Our inability in developing corporate governance models that are suitable
for Bangladesh, coupled with the pressures exerted by various foreign
development agencies, has resulted in wholesale adoption of corporate
governance models developed in the context of western countries.
Corporate governance regulations in Bangladesh thus represent a clash
between rationalism and traditionalism. Naturally, in such a case, imported
notions of rationalism could hardly compete with deep-rooted elements of
traditionalism. Thus, presence of dominant family ownership in the
corporate sector in Bangladesh has resulted in the development of a
culture where important corporate decisions are made in family meetings,
rather than Board meetings. Also, the family owners have been reported to
be regularly failing to appreciate the value of important corporate
governance mechanisms, such as external audit. Thus, despite the
changes made in the Banking Companies Act, corporate governance
practices in Bangladeshi banks have remained mostly ritualistic in nature.
In a bid to address this issue, the government introduced some important
changes in the Banking Companies Act in 2013. The amended Act allowed
each bank to have a maximum number of 20 members in its Board, and
required that at least three of the directors would be independent. A
maximum number of two family members, including spouses, parents,
children or siblings could hold directorial posts. Also, the directors were
allowed to hold their posts for two successive terms (six years), after which,
they would have to take a break for at least one term. The amendments
made to the Banking Companies Act appeared to be aimed at reducing
family dominance in the Board, and protecting the interests of the non-
family owners of the banks. Such regulatory reforms also put us ahead of
our neighbouring countries. The Banking Regulation Act of India (1949) still
does not have any provision to effectively tackle family dominance in the
Boards of the banking companies, although the Guideline on Ownership
and Management in private sector banks, issued by the Reserve Bank of
India (RBI) in 2005 advises banks not to have 'more than one member of a
family or close relative' in the Board. The Bangladesh Bank appeared to be
very serious in implementing that regulation. In 2014, it reprimanded four
commercial banks for their failure to comply with the new regulations
relating to the maximum number of family members in the Board, and
asked them to bring the number down in line with the new requirements.
Thus, slowly but surely, corporate governance regulation in the banking
sector in Bangladesh was moving in the right direction. The corporate
governance mechanisms, along with the Bangladesh Bank's efforts to
mobilise resources through mainstreaming CSR activities in banking
companies, were starting to get global recognition. It would be fair to expect
that over a longer period of time, the reforms made prior to 2017 would
contribute to offsetting the influence of family members in the Board and
enhance the efficiency of the rational corporate governance mechanisms,
eventually ensuring a fairer distribution of wealth amongst the
shareholders. The newly proposed amendments, therefore, appear to be a
step backward, and would be worth re-considering.
Writer: Dr Javed Siddiqui teaches auditing and corporate governance
at Alliance Manchester Business School, University of Manchester,
UK. javed.siddiqui@manchester.ac.uk

Reference: http://thefinancialexpress.com.bd/views/proposed-
amendments-to-the-banking-companies-act-a-step-backward

Banks miss out on good corporate governance

The root cause of global recession (2008 onwards) can be traced back to
the mismanagement of banks and financial institutions. Despite all the
measures taken by different countries, with the US taking the lead, full
recovery has not yet been forthcoming. The year 2017 has been a
challenging one. Small economies like Bangladesh are by no means
invulnerable to fallouts from global downturns or negative spill over of
policies of large economies and therefore have a strong stake in global
stability and economic growth. In forums such as the G-20, countries like
Bangladesh need to argue forcefully for the same priority in stability as
recovery, as well as for stability action agenda going beyond addressing
symptoms (i.e. lapses in risk management, inadequacies of regulation and
supervision) to addressing underlying causes (i.e. lax policies, non-
compliance of prudential and management norms, poor financial reporting,
unbridled liquidity expansion that incubate bubbles.)
So what are the implications of the Bangladesh economy minimizing
external shocks and internal shocks? This article will mainly address the
several challenges faced by the banking sector in creating internal shocks
in the economy. The Hallmark and Bismillah Group financial scams and
then the financial irregularities in the BASIC Bank which are state-owned
commercial banks, have demonstrated cracks in the management of these
banks. From the Board of Directors to the management group to the lower
level officials, these banks have not shown any sign of good governance,
transparency and accountability. The disturbing fact is that these
irregularities have permeated to private commercial banks as well.
There are several state-owned and private banks that have slightly different
governing structures but follow the operational guidelines of Bangladesh
Bank in terms of prudential and management norms. The norms provided
by Bangladesh Bank are fairly well formulated and follow international
standards. The International Accounting Services Board (IASB) under the
Bank for International Settlements (BIS) in Basel, Switzerland, has
provided three major norms namely Basel I, Basel II and Basel III. Basel I
of 1988 required that banks and financial institutions have sufficient capital
adequacy, which was originally 8% of risk weighted assets (RWA). Later
on, it was raised to 10% for banks, including those in Bangladesh. There
are some banks in Bangladesh whose required capital adequacy falls short
of the norm. Basel I set up a mechanical, non-market oriented
measurement of capital adequacy which could not take care of
fundamental risks, e.g. operational risk and market risk. Basel II, introduced
in 2004, took care of the different types of risk for financial intermediaries
(i.e. banks) as well as the supervisory review process for the management
of banks.

The global community realized the inadequacies of Basel I and Basel II

during the recent global financial crisis of 2007. Basel III was introduced in
2013 and is supposed to be completed in 2020. The major aspects of Basel
III are: first, to strengthen the capital framework of banks and to give more
emphasis on equity capital (Tier-1, core capital); second, to ensure global
liquidity; third, to highlight systematic risks as well as mitigation measures
that address the risks. Two major aspects regarding liquidity are Liquidity
Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). Bangladesh
bank has recently issued a circular to implement Basel-III liquidity ratios.
Besides the three international Basel norms discussed above, banks follow
other guidelines prescribed in the various Acts and Regulations in their
respective countries.
Financial reporting by banks is very important in ensuring the interest of
depositors, as well as that of the clients. I shall now highlight the aspects
that are related to the compliance of different rules, regulations and norms,
prescribed for banks. In Bangladesh, as pointed out earlier, the regulatory
requirements of banks follow international standards. Besides these, the
Bank Company Act provides guidelines for the preparation of reports,
including audit reports. On top of that, state-owned commercial banks and
specialized banks, like Krishi Unnayan Bank (RAKUB), follow the
requirements laid down in the respective Acts through which they were
established. The Registrar of the Joint Stock Companies and Firms
(RJSC&F) also has certain rules for entities registered under the Company
Act and the Societies Registration Act. Similarly, Bangladesh Securities
and Exchange Commission (BSEC) has laid down rules for companies to
prepare their financial reports.
On the whole, requirements for the financial reports of banks, non-bank
financial institutions (regulated under the Financial Institution Act) and
various companies are quite satisfactory in Bangladesh. The disturbing part
is that these requirements are not properly complied with by various
institutions. This means that the implementation (enforcement and
compliance) of rules and regulations is the "Achilles Heel". Despite
supervision and monitoring by the regulatory bodies such as Bangladesh
Bank and BSEC, serious mismanagement and malpractices have occurred
in the banking sector as well as in the capital market. The disclosure of
banks in their financial reports is prepared following the International
Accounting Standards-30 (IAS-30). This has been replaced by International
Financial Reporting Standards (IFRS-7).
According to this format the financial disclosure is more logical, which
means that banks now face higher risk in investment and management of
capital. If the required standard is followed then depositors and clients of
the bank and the general people will not face any loss. Besides IAS-30,
there are also IAS-32, IAS-39 and IFRS -9, which are prescribed for the
management, supervision, and monitoring of financial intermediaries. The
government of Bangladesh has promulgated the Financial Reporting Act
(FRA Act) in September 2015. Under the aegis of FRA Act 2015, the
Financial Reporting Council (FRC) has started functioning from the middle
of this year. The 12 members Council will ensure accountability and highest
standards of performance of the professional accountants and auditors and
enhance credibility of financial reporting. The FRC is empowered to cancel
the registration of auditors and give punishments for fabricating audit
reports. We expect that FRC will be proactive to bring discipline in the
banking sector.
It must be pointed out that a balance must be made between the regulation
and independence of a bank. This means that banks should neither be
overregulated nor should they be left alone to enjoy complete freedom,
which often results in banking disasters. This point has been very aptly
articulated by Jean Tirole, the Nobel Prize winner of Economics (2014) in a
book jointly written with his colleagues. It is important to keep in mind what
financial regulation is meant to achieve. The most important objective is to
protect depositors, investors, the general public and the real economy (real
goods and services) as a whole. The second rationale for regulation is to
minimize the domino effect of the systematic risks of the financial
institutions which destroy the foundation of economic activities resulting in
loss of real output, lower growth, higher unemployment and reduction of
human welfare. Good governance in the banking sector is an important
agenda of our country, especially in the present context of the crisis in the
banking sector. Transparency and accountability have recently become an
issue of greater concern with revitalised importance in the context of public
and private responsibility of managing banks. The International Monetary
Fund (IMF) has defined transparency as "an environment in which the
objectives of policy, its legal, institutional and economic framework, policy
decisions and their rationale, data and information related to monetary and
financial policies, and in terms of agencies' accountability, are provided to
the public on an understandable, accessible and timely basis" (IMF-1999).
Transparency in government operations is an important pre-condition for
macro-economic fiscal sustainability good governance, and overall fiscal
discipline. Accountability, in the words of Lessinger (1970), "is the product
of a process which means that an agent, public or private, entering into a
contractual agreement to perform a service will be held answerable to
perform according to agreed upon terms, within an established time period
and with stipulated use of resources and performance standard ."
Transparency is necessary to ensure accountability among the major group
of participants in financial markets: borrowers and lenders; issuers and
investors; and national authorities and international financial institutions.
Transparency and accountability are mutually reinforcing. Transparency
enhances accountability by facilitating monitoring, and accountability
enhances transparency by providing an incentive for agents to ensure that
the reasons for their actions are properly disseminated and understood.
Perfect examples are the Hallmark, Basic Bank and Bismillah Group
scandals which occurred due to the lack of both transparency and
accountability. Both the borrowers and the officials colluded in a non-
transparent manner and siphoned off huge amounts of public money. The
people who are responsible have not yet been subjected to administrative
and legal actions, in fact they got "perverse incentives" and the honest and
dedicated people working in the same bank and elsewhere are pushed
back into inefficiency. As the saying goes, "Bad money drives away the
good money."
The transparency of financial statements of banks is secured through full
disclosure and by providing fair presentation of useful information
necessary for making economic decisions to a wide range of users. In the
context of public disclosures, financial statements should be easy for users
to interpret. Whereas more information is better than less, the provision of
information is costly. Therefore the net benefits of providing more
transparency should be carefully evaluated by standard setters. The
adoption of internationally accepted financial reporting standards is
necessary to facilitate transparency and contribute to proper interpretation
of financial statements. In the context of fair presentation, no disclosure is
probably better than disclosure of misleading information. Left to
themselves, markets cannot generate a sufficient level of disclosure. Here
is the vital role of the accountants, as the bulk portion of useful financial
information used by the market participants are provided by the accounting
information systems, where the preparers (the employed accountants)
provide information which is authenticated by external accountants on the
basis of International Accounting Standards (IAS) and International
Standards of Auditing (ISA). An accountant should not depend on numbers
only, one should engage one's own logic and judgment to analyze a set of
numbers.
With the view of strengthening good governance in the financial sector,
especially in the banking sector, Bangladesh Bank embarked on several
financial sector reforms over the years. A large number of home grown
reforms have already been taken and some are underway. Bangladesh
Bank attempted to strengthen the legal framework of the financial sector,
bring in dynamism, extend autonomy to the central bank, combat money
laundering offences, and stop financing for terrorism. There are several
other prudential norms already discussed in the previous section in relation
to the Basel Guidelines and the guidelines of various Acts of Bangladesh.
One important aspect is the management norms, which concern the fit and
proper test for CEOs and directors of a bank, restrictions on the
composition and functions of the Board of Directors. Banks have been
directed by Bangladesh Bank to include one independent director in the
Board of Directors. Audit Committees for all banks were mandated with
clear guidelines, and TORs and an early warning system (EWS) were
introduced. The Core Risk Management Guidelines on five major risks
were introduced quite some time back and credit risk assessment by
External Credit Assessment Institutions (ECAI) have been recommended
for all commercial banks. However, in recent times we have seen that
many of these management norms are not followed by banks. There are
several privately owned banks where a number of family members are on
the Board of Directors, which is contrary to the notion of good corporate
governance. Therefore one of the main challenges for the banking sector is
to ensure good corporate governance which will benefit the depositors,
borrowers and investors; expand potential markets; broaden ownership;
create alternative financing options; accelerate growth; increase
employment and help reduce poverty in Bangladesh.
To balance the objectives of good governance and ensure compliance of
regulations, three major steps are necessary: (a) a strong and independent
central bank with more focus on core banking issues, (b) a well thought out
set of prudential and management norms of the central bank that are not
subject to frequent changes due to external political/administrative
pressure, and (c) a system of prompt corrective actions for management of
crises and for legal/administrative actions against persons responsible for
crises in a particular bank or in the banking 'system' as a whole. If we fail,
the financial crisis like a contagious disease will spread to the real sector of
the economy which will pose serious threats to and path for sustainable
economic development.
Writer: Dr Salehuddin Ahmed is a former governor, Bangladesh Bank
& professor, Business School, BRAC University.
asalehuddin@gmail.com
Reference: http://today.thefinancialexpress.com.bd/print/banks-miss-
out-on-good-corporate-governance-1511358519

Misgovernance jeopardising banking sector stability

The media over the past few weeks have drawn attention to the startling
rise in the number and volume of non-performing loans within the banking
sector, both public and private.

It has been pointed out that at the end of September, 2016 the figure of bad
debt stood at Tk 657.31 billion and a year later this figure increased to
more than Tk 803.07 billion. In the last three months the amount has
increased by nearly Tk 60.00 billion. Until June, 2017, the amount of
defaulted loan stood at Tk 741.48 billion. These details are based on
information released by the Bangladesh Bank.
The seriousness of the situation will be better understood when one
realises that the total figure is more than 30 per cent of Bangladesh's 2017-
18 budget and equivalent to about 13 per cent of its Gross Domestic
Product (GDP) at constant price.

Bangladesh Bank data show that six state-owned banks have the highest
amount of default loans. By the beginning of October, 2017, the total bad
debt of Sonali, Janata, Agrani, Rupali, Basic and BDBL stood at Tk 385.17
billion. These banks had disbursed loans of Tk 1,316.89 billion and are now
facing capital shortages with the rise in bad loans. 23.79 per cent of loans
disbursed by specialised Bangladesh Krishi Bank and Rajshahi Krishi
Unnayan Bank have also turned into default loans.
In September, 2017 local private banks had default loans of Tk 339.73
billion or 5.97 per cent of the total disbursed amount while bad loans of
foreign banks operating in Bangladesh amounted to Tk 22.98 billion or 7.89
per cent of the disbursed amount of Tk 291.16 billion.
Things came to a head when Farmers Bank failed twice to honour a
cheque worth Tk 3544 million (35.44 crore) presented by Bangladesh
Telecommunications Company Ltd. This surfaced soon after Bangladesh
Bank had forwarded a report in October, 2017 to the Parliamentary
Standing Committee on Finance that suggested that this bank did not have
the capacity to pay back funds to depositors and also to other banks.
Farmers Bank had apparently failed to maintain the statutory liquidity ratio
and cash reserve ratio as required under the Banking Company Act. This
bank is also apparently facing serious difficulty in paying back the amount
of Tk 1.24 billion borrowed from the call-money market.
The situation in the troubled Farmers Bank persuaded its chairman Mr.
M.K. Alamgir and also the chairman of the bank's audit committee to resign
on November 27. One hopes that the financial problems of the bank will
now be addressed with greater care by the Bangladesh Bank.

Indicators suggest that the high level of non-performing loans (NPL) is

indeed a cause for serious anxiety. In terms of percentage, Bangladesh
Bank statistics state that in September 2016 it was 10.34 per cent of loan
disbursed. In December last year it came down to 9.23 per cent. It
increased again and crossed the 10 per cent mark to 10.53 per cent in
March, 2017. It reduced slightly to 10.13 per cent in June, 2017 before
rising again to 10.67 per cent in September, 2017.
Analysts and economists say that bad debts in the banking sector has
continued to rise due to two critical factors associated with misgovernnce.
Most of these default loans are approved through misuse of socio-metric
overlay (in public administration terms), political considerations, family
connections, and director of one bank taking loan from another bank with
the help of a director of another bank and vice versa.
Examples of such misuse and inappropriate governance of financial and
banking institutions are found in the unfortunate cases of Hallmark, Basic
Bank and the activities of the Bismillah Group. Salehuddin Ahmed, former
Governor of Bangladesh Bank, has correctly observed that "both the
borrowers and the officials colluded in a non-transparent manner and
siphoned off huge amounts of public money". It is disappointing, according
to the former Governor, that those responsible and guilty of these misdeeds
"have not been subjected to administrative and legal actions".
It is true that the past two decades have seen efforts to increase the
quantity and also improve the quality of banking services in Bangladesh. A
broad spectrum of digitalisation, including electronic, has enabled the
country to expand the banking sector and also the range of banking
products not only in the urban but also the rural areas.
However, according to economist Sadiq Ahmed, Vice Chairman of the
Policy Research Institute, 'deep fault lines are emerging' along with such
growth and diversification and they need to be addressed. He has identified
two contributory factors, growing incidence of NPL and growing asset
concentration among single borrowers. He has observed that these
aspects need to be understood against the requirements and norms
underlined in the Basel rounds. This would apply particularly with regard to
NPLs in private banks. That adds a critical dimension to the problem.
Dr Sadiq has drawn attention to a significant point related to the 'prudential
instruments for portfolio mnagement'. In this context, attention has been
drawn to the need for selecting Bank Board members based on the "fit and
proper test" and the growing weakness of this in the private banking sector.
Consequently, on different occasions decisions are taken not on "solid
business evidence but on connections'. That adds to the risk and
probability of NPLs.
As such, at this critical juncture, the last thing one needs is the enactment
of the Banking Companies (Amendment) Act, 2017. This would allow for
four Directors from a single family in a Bank's Board instead of the current
two and also extend the tenure of Directors. Such a move can only
increase risk of NPL and affect adversely the economic health of financial
institutions. This needs to be avoided.

Examples of big business houses creating serious malfunction through

massive loans used for speculative commodity trading or in stock market
shares or real estate transactions are a galore. Such large exposure
creates a greater risk of NPL.
It is such a potential scenario that requires a greater interactive
engagement on the part of the Bangladesh Bank. This institution needs to
be given full autonomy and independence with regard to its regulatory
responsibilities. This should include the ability of the Bangladesh Bank not
only to set banking sector-wide exposure limits but also to closely monitor
implementation of loan facilitation when the amounts cross certain limits
and take the necessary corrective measures.
We must not forget that financial regulations are codified with certain
important objectives. That include protecting depositors, investors, the
general public and the economic dynamics associated with trading in goods
and services. This will be possible only through transparency in the
decision-making format. That will then ensure accountability and to a great
extent help containing NPLs.

Better corporate governance should be ensured in the banking sector. That

will help solve the problem of non-performing loans which, in turn, brighten
the scope of foreign direct investment in the country.
Writer: Muhammad Zamir, a former Ambassador and Chief
Information Commissioner of the Information Commission, is an
analyst specialised in foreign affairs, right to information and good
governance.

Reference:
https://thefinancialexpress.com.bd/views/views/misgovernance-
jeopardising-banking-sector-stability-1512315057