The Banking sector of Bangladesh
is at a critical turning point. While the banking sector is showing signs of
recovery, the crisis of confidence driven by staggering quantities of
non-performing loans (NPLs) paired with major corporate governance failures has
overall left the wider financial system bleeding and vulnerable. While the
previous government advocated for merging or making banks merger, at one point
they threatened to “force” certain banks to merge, most of which were
incorporated by a certain class of industrialists to cater to their own business
and personal needs.
Under the current interim
government, those echoes have grown ever stronger as the only solution to save
these failing banks by merging them, injecting them with fresh liquidity and
the government acquiring a majority control of the shares, etc. While on paper
this is a sound plan, the reality check this plan may face on the ground is
quite different. If anything, this is a very high stakes gamble with a risk of
it triggering an even deeper crisis with the potential to trigger a national
scale financial meltdown.
The Stakes: Why this Gamble is
necessary
The core issue is, multiple
private banks had been mismanaged over the last two decades burdened by NPLs to
the point of near collapse. If left unchecked as they are currently, these
banks may cause a systematic collapse of the banking system itself, because in
this modern age interconnected economy, not just the domestic banking system
but the international financial markets are deeply connected to each other. So,
when one institution collapses, it puts a financial and reputational burden on
the whole system.
The government’s rationale is by
merging these troubled banks, injecting fresh liquid capital (by printing more
money which in turn will increase inflation which has already been done several
times now) and the government itself buying out a majority shares of the new
merged bank (which shall be sold in the future to investors once the new bank
turns a profit), we can avoid these struggling banks going bankrupt and protect
depositor funds.
Bank Resolution Ordinance 2025
was enacted which gives the central bank authority to intervene and take
control of these struggling banks in the hope that this can rescue the
struggling banks, protect depositor interests, improve the weak corporate
governance culture, regain public trust and create a more robust banking system
for the future.
What Could Go Wrong: The Risks
A key concern is the prospect of
whether merging “bad” with “bad” will end up creating an even larger
dysfunctional and fragile bank.
Instead of forming a consolidated
stable banking giant, it might create an even bigger problem just waiting to
collapse in the future. A poorly executed bank merger can backfire and erode
public trust in the banking system even more leading to panic among depositors
which can result in a bank run resulting in a national scale financial crisis.
Other hurdles which plagued these
troubled banks such as political interference and pressures, influence of
industrial groups, corruption and poor corporate governance won’t be solved by
mergers automatically. Without addressing these critical issues, the newly
merged bank will be a victim of the same problems that plagued them in the
past.
The current merging strategy is
multi-faceted. This strategy includes merging troubled banks, conducting
forensic audits by international firms to assess their financial health, etc.
The Stakeholders: Government,
Depositors, Bank Shareholders - Strategy vs. Reality
The success of this strategy is
not guaranteed as it hinges on a multitude of variables. The success of this
plan hinges on the government’s ability to enforce accountability, resist
political pressure from loan defaulters and Bank’s shareholders alike.
Do we have a past precedent for
such an initiative? Yes, kind of, at a smaller scale. Bangladesh Shilpa Bank
(BSB) and Bangladesh Shilpa Rin Sangstha (BSRS) were merged into Bangladesh
Development Bank Limited (BDBL). However, that merger has not yielded results
as it was last reported to be still struggling after it’s merger in 2009 and
ultimately, it’s fate was to be merged with state owned Sonali Bank last year.
Conclusion
As the title stated, the bank
merger initiative will be a high stakes gamble. It may potentially trigger a
deeper crisis in the future or if it goes right, bring in stability for the
struggling banks which in turn will help with overall systematic stability of
the overall financial sector.
They key hurdles to these bank
mergers working out would be to strongly address the issues of poor corporate
governance, political industrial group influences and the complete lack of
accountability plaguing the banking sector.
Ultimately, the success or
failure of these bank mergers will not be determined by the mergers themselves,
rather it will depend on the nation’s new leadership’s willingness to allow
banking authorities such as the Bangladesh Bank, Bangladesh Financial
Intelligence Unit (BFIU), Anti-Corruption Commission (ACC), etc to perform
their functions independently.
Written by
Shafqat Aziz
Barrister (of Lincoln’s Inn)
LLM Corporate Law, NTU
PGDL, UWE Bristol
LLB, BPP University
Accredited Civil-Commercial Mediator (ADR-ODR International)
First published by The Daily Observer: Bangladeshi Bank Mergers: A High-Stakes Gamble
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