A Tangled Mess of Governance
Failures
Bangladesh cannot sustain its
growth economically if our banking system remains feeble and compromised. The
solutions are well known: Independence, accountability, transparency, good
compliance, governance, and professionalism. What’s missing is the willpower to
enforce them.
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Photo Credit: Shutterstock |
Its transformation from being
dubbed as a bottomless basket to an emerging Asian Tiger has been bolstered by
steady, above-average GDP growth, export earnings, and significant poverty
reduction.
However, beyond this exterior
economic façade lies a severely decadent skeleton: The banking sector. The
present condition of this vital sector risks eroding all that we have achieved
in the past few decades due to mismanagement, rising NPL (Non-Performing
Loans), poor corporate governance, weak regulatory oversight, political
patronage, dominance of families in bank’s boards: Resulting in a sharp erosion
of public’s trust in the banking system.
This crisis is real, with a
drastic deterioration on the horizon.
Political Interference
At the core of this current
crisis is the unchecked influence of majority/ controlling shareholders. These
shareholders have been unabashedly putting their favourites in all positions:
Starting from employees at all levels, even board of directors and chairperson.
These appointments are done based on political affiliations or connections, not
merit.
This has created a culture of
incompetence in running, and consequently ruining the banking sector, and has
also created a sense of false or forced “fealty” among the appointees where
they feel they “owe” something to their “benefactors” who secured their
employment.
This is particularly prevalent in
disbursing loans to borrowers who neither have the intention nor the capacity
to repay the loans if they went through a proper compliance test process before
the loans were issued.
Large sums of funds are disbursed
via loans to these politically connected individuals without adequate
collateral or even no collateral at times, bypassing proper risk assessments.
These loans often end up being
laundered offshore via hundi or fake LC (Letter of Credit). When these loans
end up being defaulted, the defaulters exert their political pressure on the
regulators to look the other way or not take actions against the defaulters.
Family-Controlled Boards and
Ignoring Conflicted Interests
Most banks are founded, or owned,
or controlled by its founders, who treat the banks as their personal coffers.
Their majority stakes entitle them to call the shots to fund their own business
and/or personal interests and/or their friends and families.
Instead of going public, which
would make them accountable to its depositors, shareholders, and regulators,
they prefer to remain private.
These immoral practices erode the
independence of the management as they have to give in to pressures or
“requests” from the board even if they violate fundamental banking principles
or give rise to clear conflict of interests.
The very individuals tasked with
ensuring good compliance, governance or risk management for the bank are the
ones who end up being coerced into issuing bad loans which won’t ever be
repaid.
Weak Transparency and
Regulatory Oversight
The checks and balances that were
supposed keep banking operations transparent have instead been compromised.
Internally, compliance, governance & regulatory affairs teams are hamstrung
by the influence of the board who are themselves “dependent”.
Externally, on top of political
influences, external auditors are “convinced” to balance the books to paint a
portray a clean financial health report of banks while they are collapsing
internally.
Lately, it has been revealed that
many banks which have been giving completely pristine audit reports were in
fact on the brink of collapse.
Regulatory oversight is something
most banks don’t take seriously. Their boards & political connections can
stop any investigations on their tracks that the regulatory bodies initiate.
Additionally, the so-called clean
records generated by the façade of internal and external audit reports don’t
really paint any major red flags of financial malpractice for the regulators to
notice.
The smaller minority shareholders
lack control/influence over the board to voice their concerns or make any
impactful complaints to the regulators.
The Human and Economic Costs
The impact of these failures is
not insulated from the wider economy. NPLs now account for a large share of the
banking sector which stifles the flow of fresh funds towards profit generating
businesses, reducing bank’s profitability. This also makes shareholders’
dividends uncertain. The backbone of our economy, the SME (Small to Medium
Businesses) sector, is the worst affected by far.
Repeated financial scandals have
also gravely impacted depositor confidence. Customers do not feel safe
entrusting the banks with their hard-earned savings. The government’s response
usually has been to print more money to inject these failing banks, rewarding
this mismanagement culture instead of punishing them resulting in consistently
high inflation – the price which is again paid by the public.
Rules won’t work without
enforcement
The primary regulators for banks,
the Bangladesh Bank has constantly issued timely circulars addressing these
issues. However, Bangladesh Bank is not an enforcement body. Therefore, when
they do try to take any actions, they are foiled by politically connected
defaulters and family backed boards. Rules without enforcement do not mean
much.
Recommendations for banking
reforms addressing these issues.
Ensuring Regulatory
Independence
Bangladesh Bank must be allowed
to be truly independent and self-governed by insulating its leadership away
from political pressures. They must have the authority to penalize defaulters
regardless of their affiliations, revoke or suspend financial licences or
prevent/remove farcical appointments.
Bank Board reformation
Appointments to the boards should
be based on merit and professional expertise, not political or family ties. A
clear distinction is required between the ownership/majority shareholders of
the bank with the management to reduce conflicts of interest. Additionally,
Bangladesh Bank should have the ability to enforce them.
Strengthening Audit, Compliance,
Governance and Transparency
Audit, Compliance &
Governance standards have not worked clearly due to a lack of oversight,
evident by NPLs that weren’t stopped from the start. Future standards should be
of international standards and more importantly enforceable.
Tackling the Culture of Loan
Default Normalization
Loan defaulters, regardless of
political or business influences must face legal consequences and financial
embargoes instead of staying legal proceedings for years on end.
A new standardized system of
asset recovery, special speedy tribunals and restrictions/further financial
scrutinization must be enforced on wilful defaulters to set an example to
others who may attempt to abuse the current system.
Protecting Depositors and
Shareholders
Protection of depositors must be
ensured even if implementing these reforms mean dissolving some financial
institutions. While current laws do have protection for minority shareholders,
they can be improved.
Limiting Family and Group
ownerships
Just as monopiles are bad for the
economy, concentration of ownership in the palms of a few families are equally
harmful, if not more. This culture has weakened governance. Regulators can set
limits on family representations on boards and encourage diversified ownership
structures.
Bangladesh cannot sustain its
growth economically if our banking system remains feeble and compromised. The
solutions are well known: Independence, accountability, transparency, good
compliance, governance, and professionalism. What’s missing is the willpower to
enforce them.
Without reforms, banks shall
continue to drain public resources and undermine investor & depositor
confidence alike. With reform, banks can once again become huge engines of
economic growth.
Written by:
Shafqat Aziz
Barrister (of Lincoln's Inn)
LLM Corporate Law, NTU
Industry & Alumni Fellow, NTU
PGDL, UWE Bristol
LLB, BPP University
Accredited Civil-Commercial
Mediator (ADR-ODR International)
https://www.linkedin.com/in/shafqat-aziz-29a3a5171/
First published by CounterpointBD: A Tangled Mess of Governance Failures
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