While I was being interviewed for the CEO position at a second-generation private, commercial bank in early 2001, a distinguished board member repeatedly asked me one question: “Our present CEO made us Tk200 crores in profits last year, how high can you take that figure for us?’
Like it or not, over the last decade or more, the banking industry has made double-digit profit percentages, sustaining growth and surviving cut-throat competition while providing attractive returns to shareholders.
But, the greed for ever-greater profits -- without any regard to fundamentals – is affecting people’s perceptions of the industry itself, and rightly so. People are questioning the motives of the industry and wondering if it is actually helping our development.
Even foreign countries are wary of investing here because of all the scandals surrounding the financial sector, and consequently, we are losing out on much-needed funds.
At the same time, local entrepreneurs with great ideas are also being deprived of proper access to finance because of the various problems in the banking sector.
The banking sector could be our pride and a major growth engine of the economy. But instead, it is doing everything it can to enrich its owners, at the expense of everyone else
Scandals
News about bank directors and chairmen’s involvement in politics and underhand deals using banks’ goodwill has raised questions about banks’ integrity in running their operations.
It makes you wonder whether all the disclosures in the annual reports and other regulatory paperwork are only a sham.
The image of the banking industry has been tarnished by numerous scandals directly implicating the owners and directors of the banks.
Just recently, there was a lot of media coverage on a number of prominent banks being involved in underhand activities. The scandals eventually led to a number of directors resigning or being removed in order to avoid any further controversy.
Despite the considerable progress our banking sector has made, foreign countries still have doubts about our banking activities because of the unscrupulous practices of a number of prominent banks.
Fixing that unfavourable image is not the only hurdle on the road to developing a respectable and successful financial sector; there are also problems regarding 2 Ps 3Cs and a T- people, product, compliance and ethics, competition, change management and technology among others.
Unhealthy competition
Though some people may disagree, competition in Bangladesh seems to be the deadliest of all. It’s not the good kind of competition that leads to overall improvement, but an unhealthy, cut-throat competition that hurts the larger economy.
In economics, “competition” means something very different from what we are seeing in our economy, particularly in banking.
But the Bangladeshi brand of competition has contributed little in terms of positive developments for the nation, but a lot in terms of encouraging malpractice.
According to economic theory, competition only leads to positive gains for the whole economy under certain conditions. Those conditions are: Perfect information (transparency), and low barriers to entry, both of which are lacking in our banking sector due to regulatory shortcomings.
There is competition not only from other banks but also from non-bank financial institutions (NBFI) and micro finance institutions (MFI), and no effective framework or regulatory body to harmonize them.
Not only are the institutions competing, the regulators and customers are also pitting one against the other, making the situation extremely difficult giving you the feeling of being stuck between a rock and a hard place.
A customer will often try to make the best out of the situation by not complying with the regulatory requirement, referring to the service provided by another bank or banks.
The requirement of bank executives to meet steep targets often results in succumbing to the demand of these corporates, resulting in the bypassing of regulations, because it’s a matter of survival for them.
One bypass results in another, and then another, resulting in a continuous loop of malpractice that has now become the norm.
Competition in the banking industry is also taking a hit from the capital market end, as the big banks are increasingly going to the equity market to raise more funds.
This not only hits the banks in the belly by affecting their core business but also indirectly affects their contribution to market cap which dropped from 59% in 2007 to less than 17% in January 2018.
More importantly, it forces them to risk their position by over exposing them to volatile capital market through proprietary trading and position taking in order to maintain profitability.
On a different but equally serious note, all of us feel that the banking industry badly needs skilled human resources who will not only service old products but will also create and launch new innovative products.
Educating the market remains the first requirement towards creating new products and developing skilled human resources.
Regulatory challenges
Besides people and product issues, we need to be ever vigilant about the ever-changing technology and regulatory requirements.
The new guildelines in the market are the requirements of BASEL II & Automated Clearing House. People have also started to talk about BASEL III.
The major challenge with change of regulation is that often the regulators are in a hurry to implement a sudden decision, rolling out action plans without proper research or understanding of the broad implications and capabilities of the banks to comply with it.
The outcome is delay in implementation, confusion among stakeholders and new techniques to bypass these regulations.
This in its turn creates a non-level playing field for those who comply with the regulation versus those cleverly “managing” the situation without having to comply.
Too much noise and too little action casts doubt on the sincerity of their purpose.
As a law-abiding citizen you wonder why it is so easy to “manage” non-compliance.
The question remains -- who stands to lose from this?
Ultimately, every citizen of the country is affected as the whole country suffers.
The banking sector could be our pride and a major growth engine of the economy. But instead, it is doing everything it can to enrich its owners, at the expense of everyone else.
Regulators are mostly taking appropriate decisions to implement proper regulations at the right time.
A good example is when several financial institutions shifted towards the riskier capital market to counter the lower growth in their core businesses using the depositors money, the regulators aptly stepped in to make merchant banks separate subsidiaries.
The regulations are there. The problem is enforcing them in an honest manner.
If the regulators and the legal system were honest then all these recurring image issues and malpractices could have been avoided.
Going forward
Facing the challenges head-on in a compliant manner should be our goal towards creating a sustainable, profitable and forward-looking banking sector.
We need to do more and run faster with clear visibility about the destination. Perhaps, it also has to do a lot with the overall governance and accountability situation in the country.
A gentleman asked the esteemed editor of an English daily: “Why do you have so many negative headlines on your paper one after another?’
The editor replied: “Don’t create negative stories, and we won’t publish negative headlines.”
Mamun Rashid is a leading banker and economic analyst.