Reforming the Banking Industry: A Crucial Step in Rebuilding Bangladesh

Amid widespread protests that led to the removal of former Prime Minister Sheikh Hasina, Bangladesh is navigating a defining moment in its history. The interim government, now led by Nobel laureate Professor Dr. Muhammad Yunus, is tasked with addressing systemic issues that have severely impacted the nation's economy and public trust. Among these, the reform of the banking sector stands out as paramount for ensuring economic stability and restoring public confidence. This article will discuss the challenges facing the banking sector, the systemic corruption and regulatory weaknesses, the loss of public trust, and the crucial role of the interim government in implementing necessary reforms.

Challenges Facing the Banking Sector

Bangladesh’s banking sector has long been marred by corruption, non-performing loans (NPLs), and weak regulatory oversight. Under the previous regime, irregularities such as loan forgery, fraud, and political interference became rampant. These challenges have severely weakened the financial system, eroded public trust, and hampered economic growth.

1.????? Current Status of NPLs in Bangladesh: The non-performing loans (NPLs) in Bangladesh's banking sector have reached alarming levels, hitting an all-time high of Tk 2.11 lakh crore by the end of June 2024. This marks a sharp increase of Tk 29,096 crore in just the June quarter, highlighting the severity of the situation and the pressing need for reform. Among the six state-owned commercial banks, defaulted loans totaled Tk 126,111.5 crore as of September 2024, constituting 40.35% of their disbursed loans. Specifically, Janata Bank had the highest NPLs at Tk 60,489 crore, followed by Agrani Bank with Tk 26,891 crore, Sonali Bank with Tk 16,623 crore, and Rupali Bank with Tk 12,738 crore. A White Paper on Bangladesh’s economy revealed that distressed assets in the banking sector amounted to Tk 6.75 lakh crore by the end of June 2024, representing 31.7% of total loans. To put this into perspective, this figure is equivalent to the cost of constructing 14 Dhaka Metro systems or 22.5 Padma Bridges. Furthermore, the estimated amount of money stolen from banks is nearly 105 times the lifetime income of the average Bangladeshi. Comparatively, the total defaulted loans in March 2024 stood at Tk 182,000 crore, a staggering rise from Tk 22,000 crore in 2009. These figures underscore the critical challenges faced by Bangladesh’s banking sector and the urgent need for comprehensive and effective interventions.

2.????? Corruption and Mismanagement in the Banking Industry

Corruption and mismanagement are deeply entrenched in Bangladesh's banking sector, facilitating illicit financial activities and jeopardizing the financial system.

Estimated Amount of Money Stolen: The amount of money stolen from banks is estimated to be 105 times the lifetime income of an average Bangladeshi. Illicit financial outflows have averaged $16 billion annually between 2009 and 2023.

Banking Loan Scams: The sector has been plagued by numerous high-profile loan scams.

o??? The S. Alam Group has been implicated in several banking loan irregularities. The Group has taken out significant loans from various banks, often exceeding the single borrower exposure limit. For instance, the group took Tk 10,449.45 crore from Janata Bank, which was 451 percent of the bank's paid-up capital. Banks are not allowed to lend more than 25 percent of their paid-up capital to a single party, according to the Bank Company Act. Bangladesh Bank (BB) has often allowed state-run banks to exceed this limit for various conglomerates, including S. Alam Group, due to political pressure or pressure from influential quarters. The S. Alam Group has also been found to have dominated the board of Islami Bank, from which it took out a huge amount of loans. This control over the board raises concerns about conflicts of interest and undue influence in loan approvals. Loans were often approved without proper verification of documentation or the borrowers' creditworthiness. A report revealed that Social Islami Bank had concealed loans totaling Tk7,936 crore while under the control of the S. Alam Group. This highlights a pattern of hiding the true extent of non-performing loans. The S. Alam Group's case is not isolated, but rather indicative of broader issues within the banking sector. The White Paper on Bangladesh's economy has identified that politically influenced lending practices have deepened the banking sector crisis and that collusion between Bangladesh Bank (BB) insiders and influential outsiders was more apparent than ever between 2015 and 2024.

o??? The Hallmark-Sonali Bank loan scam involved over Tk 35 billion lent based on falsified documents.

o??? A phantom company, Manha Precast Technology, siphoned off Tk 1,162 crore from National Bank.

o??? IFIC Bank reported defaulted loans of Tk 2,589 crore, but a central bank inspection revealed the actual figure was over Tk 8,000 crore.

o??? An unscrupulous group allegedly withdrew Tk 20 billion in loans from Islami Bank Bangladesh Limited (IBBL) using two companies that only exist on paper. This same group reportedly extracted Tk 90 billion from three banks in the name of loans and advances without proper documentation and verification.

Collusion Between Insiders and Outsiders: The White Paper pointed out the collusion between Bangladesh Bank (BB) insiders and influential outsiders was more apparent than ever between 2015 and 2024. This collusion has led to widespread corruption and the erosion of institutional integrity.

Political Influence Impact on Loan Approvals: Loans are frequently approved based on political connections rather than the creditworthiness of the borrower. This political influence has enabled politically affiliated individuals and groups to secure large loans, often without any intention of repayment. For example, Manha Precast Technology, a company with a paid-up capital of Tk 10 lakh, received a Tk 250 crore loan within 48 hours of its formation.

Insider Lending: Insider lending is also a prevalent issue, with bank officials using their positions for personal gain and lending to connected parties without proper scrutiny.

3.????? Regulatory Weakness of the Banking Sector

The regulatory framework of Bangladesh's banking sector has been significantly weakened by political interference and a lack of enforcement, leading to a systemic crisis.

• Bangladesh Bank's Leniency and Inaction: The Bangladesh Bank has been criticized for its leniency and inaction, allowing irregularities to persist and worsen. The central bank has failed to enforce regulations effectively due to political pressure and a lack of independence. For instance, single borrower exposure limits have been routinely disregarded, with some borrowers receiving loans far beyond their capacity.
• Political Influence on Bangladesh Bank's Regulatory Actions: Political influence has severely undermined the Bangladesh Bank’s regulatory actions. The central bank's independence has been compromised due to external pressures from political forces and business groups. The central bank has relaxed or disregarded key banking regulations, including single borrower exposure limits due to political pressures. Political influence has skewed the loan approval process, with loans frequently approved based on political connections rather than borrower creditworthiness. Political pressure is often exerted on the central bank to avoid proper monitoring and inspections. The licensing of new banks has become a tool for political patronage, with ownership concentrated in the hands of politically connected individuals.
• Inadequate Monitoring and Supervision: There is an overall shortage of human resources in departments relevant to supervisions and a decrease in delegation of authority to the inspection teams, which has widened the opportunity and risks. The Bangladesh Bank's inspection teams have been negligent in detecting irregularities, as seen in the case of BIFC.
• Lack of Transparency: There has been a lack of transparency and accountability in the banking sector, which has enabled corruption and mismanagement to thrive. The Bangladesh Bank's own data on financial sector balance sheets became problematic with departures from standard accounting practices.

Why the Banking Industry Lost Public Trust

The rampant corruption, mismanagement, and regulatory failures have led to a significant loss of public trust in the banking sector.

• Erosion of Confidence: The constant exposure of banking scandals, coupled with the apparent inability of the regulatory bodies to address these issues, has severely eroded public confidence in the safety and integrity of the financial system.
• Distrust in Financial Institutions: The perception that banks are controlled by corrupt individuals, who are more interested in personal gain than the security of depositors' money, has fueled public distrust in financial institutions.
• Fear of Depositor Loss: The knowledge that a substantial amount of money has been siphoned off from the banking sector, often with impunity, has generated fear among depositors. There have been instances of depositors not getting back their money.

Role of the Interim Government in Reforming the Banking Sector

The interim government in Bangladesh has a critical role to play in reforming the banking sector to restore public trust and ensure economic stability. Based on the sources and our conversation history, here are some key actions the interim government should take:

• Establish a Banking Commission: The interim government should form an independent and neutral banking commission, composed of experts free from the government's influence and the central bank. This commission would be responsible for conducting thorough investigations into past irregularities and systemic issues. The banking commission should also take steps to ensure that individuals involved in irregularities are not reappointed in banks or financial institutions.
• Ensure Beneficial Ownership Transparency (BOT): The interim government must establish legal and institutional structures to ensure beneficial ownership transparency. This includes setting up a central registry of beneficial ownership information for all companies, making this information publicly available. This will help to prevent the use of fake and anonymous entities in banking transactions and also help to control tax evasion and money laundering.
• Strengthen Regulatory Monitoring and Enforcement: It is crucial to revive and empower the central bank to act independently, enforcing regulations without political pressure. This will require more frequent and thorough inspections. The central bank needs to have sufficient human resources in departments related to supervision. They should also ensure that inspection teams have enough authority to do their job properly.
• Increase Transparency and Accountability: The interim government should promote transparency by disclosing detailed information about the financial health of banks, including the extent of non-performing loans. Inspection reports should be made available to the public. This will allow customers to make informed decisions about their deposits.
• Address Loan Defaults and Recoveries: The government needs to enforce stricter regulations regarding loan approvals, ensuring credit is not disbursed based on political connections but on the creditworthiness of the borrower and the viability of the project. The interim government must prioritize the recovery of defaulted loans, including taking legal action against corrupt bank directors and freezing their accounts.
• Reform the Legal Framework: The interim government should review and strengthen the legal framework governing the banking sector, by amending or repealing problematic sections of the Bank Companies Act 1991.
• Improve Corporate Governance: Implement stricter standards for corporate governance, ensuring major shareholders are suitable, and that ultimate beneficial owners are disclosed. The licensing of banks should not be used for political patronage and should require proper assessment of shareholders.
• Promote Good Governance: The interim government should prioritize good governance by ensuring that policies and regulations are implemented effectively without political interference.
• Address Data Anomalies: The government should formulate white papers to address data anomalies and provide an accurate assessment of the true economic scenario.
• Restore Public Confidence: The interim government should focus on measures to restore public confidence in the banking sector by ensuring that depositors' money is secure and that the banking system is stable and well-regulated. Providing liquidity support to banks facing shortages may help in restoring customer confidence.

Reforming the banking sector is crucial for rebuilding Bangladesh. Under the leadership of Professor Dr. Muhammad Yunus, the interim government has a significant opportunity to confront the longstanding issues that have undermined the sector. Addressing corruption, strengthening regulatory frameworks, and enforcing accountability should be central to these efforts. A transparent and reliable financial system will not only stabilize the economy but also enable individuals and businesses to thrive, driving long-term growth.

To achieve this, the government must engage with key stakeholders, including financial institutions, international allies, and the public, to build consensus and implement meaningful changes. Initiatives such as modernizing regulatory practices, digitizing banking systems, and creating effective strategies for managing non-performing loans are essential for progress. Additionally, ensuring that reforms are inclusive and prioritising the needs of underserved communities will enhance the banking sector’s role in promoting economic fairness.

While the challenges are formidable, the opportunity for transformative change is equally significant. By committing to decisive and forward-thinking actions, the interim government can set Bangladesh on a course toward a more stable financial system. Addressing the rooted problems within the banking sector will strengthen economic stability and rebuild public trust, laying the foundation for a more prosperous and secure future for the country.