By Shahiddul Zahid
The banking sector in Bangladesh has faced a severe crisis of confidence under the Sheikh Hasina government. Public trust in banks has plummeted due to the lack of governance. Issues like liquidity crises have affected both public and private commercial banks. The rate of default loans has reached unsustainable levels, investment growth has stalled, and deposit collection has become negative for some banks.
With the arrival of new leadership at Bangladesh Bank, several immediate and long-term reforms are needed to stabilize the banking sector and restore public confidence. Below are the key actions that must be taken:
1. Restoring Public Confidence
The primary source of commercial bank loans is depositors’ money, which includes funds from both individuals and institutions. Depositors place their money in different types of accounts such as fixed deposits, savings accounts, and current accounts. Banks rely on these deposits for lending, but recent financial instability has caused depositors to lose faith in the system. This loss of confidence is dangerous; if depositors feel their money is at risk, they will withdraw funds, causing further liquidity crises.
To restore trust, banks must ensure that depositors’ checks are honored, even in small amounts, to prevent panic. A consistent week of honoring checks without any issues could go a long way in alleviating depositor fears.
2. Addressing the Liquidity Crisis
One of the key causes of the liquidity crisis is fund mismanagement, where short-term funds are used for long-term investments. This mismatch creates temporary financial strain. The central bank, along with well-performing commercial banks, can provide liquidity to struggling banks if their loan disbursement processes are sound. However, the root cause of the liquidity crisis lies in risky and fraudulent loans. Many of these loans were given without proper vetting, leading to massive non-performing loans.
Effective steps to recover defaulted loans are necessary, and legal action should be taken against those responsible. Additionally, the central bank should keep refinancing facilities available to help banks meet their liquidity requirements.
3. Resolving the Agency Problem
In banking, there is often a conflict of interest between the bank’s owners and its management. While owners aim for profitability and reputation, management may prioritize personal benefits like higher salaries and bonuses, which can lead to increased operating costs and reduced profits. In many cases, management has also engaged in corrupt practices by approving risky loans to benefit certain owners.
The solution lies in reforming the management of corrupt banks. If those responsible for the current crisis remain in charge, meaningful reforms will be impossible.
4. Ensuring Overall Good Governance
A lack of good governance is one of the primary reasons for the current banking crisis. Legal loopholes and political interference have exacerbated the problem. In many cases, banks have been run like family businesses, with multiple directors from the same family, manipulating loan approvals and working with other directors to facilitate large-scale fraud.
To restore governance, the central bank must enforce rules and regulations without political interference. Cases of loan fraud must be thoroughly investigated, and those responsible must face legal consequences.
In conclusion, the new leadership at Bangladesh Bank must take swift and decisive action to restore public trust, address the liquidity crisis, resolve management issues, and ensure good governance. Only then can the banking sector regain its strength and stability.
Shahiddul Zahid, Professor, Department of Banking and Insurance, University of Dhaka
