The sentiment that the banking sector is the heart of a healthy economy is more applicableto a developing country like Bangladesh than any other. Since our independence, this sector has kept the wheels of the economy on the move. So, it is obvious that any signs of disruption in the banking sector would have adverse impacts on our economy.
There has been much talk about the banking sector as of late, mostly due to its mounting non-performing loan (NPL), lack of good governance, influence of the government over Bangladesh Bank, money laundering, and malpractices by some bankers. These factors are affecting our efficiency and productivity, as well as constraining businesses and industries that truly do have the potential to grow.
The banking sector has been tarnished many times by several bouts of fraudulence ad malpractice. Although considerable progress has been made, foreign countries see our banking activities as questionable.
NPLs are one of the prime concerns hitting the financial health and stability of banks. According to data from Bangladesh Bank, the number of bad loans increased to 11.23% at the end of the third quarter of last year. NPLs now account for 11.45% of the total loans, up from 10.41% in June of last year.
A major challenge would be to cut down the upward trend of NPLs as soon as possible. For this, the government should extend its helping hands and hand exemplary punishment to willful defaulters.
Good governance is another key issue that our banking sector lacks. Corporate governance may be deteriorated when one or more banks are devoid of transparency, accountability, and compliance. The quality of governance can affect the financial soundness indicators such as asset quality, capital adequacy ratio, liquidity, earning capacity, and more. Management in these banks should keep a close eye on the operation of the bank and its branches to ensure corporate governance within the organization.
Bangladesh is a land of 170 million people and half of its population still does not have a bank account. This contradicts with the national financial inclusion strategy (NFIS). Currently, there are fewer than 10,000 bank branches in the country. The number of bank branches needs to be increased to bring people into the financial system.
Agent banking --an alternative delivery channel -- is an initiative by Bangladesh Bank to bring the disadvantaged and poor into the financial system, and is becoming popular because of its benefits for both the banks and clients, while the economy is also being benefited through financial inclusion.
This service is concentrated in only three banks, with DBBL, Bank Asia, and Al Arafah holding the major share of the market. Realizing the importance, many banks have begun the practice of agent banking but have yet to initiate the service.
Minimizing the risks of IT is another major challenge for the banking sector. All private banks and their branches are equipped with IT-capable services. SOBs are also trying to make them fully IT-reliant. Our banking sector has yet to ensure cybersecurity and risk management techniques.
According to research on cyber security by the Bangladesh Institute of Bank Management (BIBM), 52% of the banks are at a high risk of cyber attacks. It is imperative that we develop a system for stopping any cyber attacks.
Amendment of existing laws related to banking is a must, especially the Banking Company Act 1991, the Negotiable Instruments Act 1881, Money Loan Court Act 2003, and the Bankruptcy Act 1997. Some provisions of these existing laws provide protection to the habitual defaulters, which cause NPLs to go up.
Bangladesh is a cash-based society. The country is slowly moving towards being a cashless society thanks to increasing use of plastic, mobile financial services, and internet banking. Building a cashless society would be helpful in reducing tax evasion and corruption.
Our country lacks skilled labour force in every sector -- banking is not an exception. For effective and smooth operation and management of the bank, trained and skilled employees must be developed.
Our banking sector has had a big role to play in our current economic upturn. Although banks have increased in number, their service has yet to reach the vast section of disadvantaged and low-income groups.
Banks should focus on bringing these people under the umbrella of their services. In addition, the sector should develop asset quality management and show better financial performance by ensuring good governance, transparency, accountability, and adopting better risk management techniques.
Md Naimul Hossen is a management trainee officer at Mercantile Bank Limited and studying Masters in Bank management (MBM) at Bangladesh Institute of Bank Management (BIBM).