Noted economist Rehman Sobhan said that the management of the banking system in Bangladesh is more about politics than governance. He said the system is being used as a policy tool to create a pro-capitalist class.
"A class of people in Bangladesh has not only captured the state but has become the state itself. This class has now joined hands with the bureaucracy, making it very difficult to address the issue," the economist said.
Sobhan was speaking at a virtual event organized by Samaj Gabeshana Kendra on Sunday night, titled "Political Economy of Banking Sector of Bangladesh."
Discussing the independence of Bangladesh Bank and the selection of its governor, Sobhan, who is also the chairman of the Centre for Policy Dialogue (CPD), said: "The lack of independence of Bangladesh Bank is related to the issues we are discussing today.
“Initially, we had professionals like Fakhruddin Ahmed, Mohammed Farashuddin, Salehuddin Ahmed, and Atiur Rahman as governors. However, over time, bureaucrats have been appointed as governors to ensure they remain completely subordinate to the political dimensions of financial policy making."
Regarding the 6-9% interest rate ceiling and defaulted loans, Rehman Sobhan pointed out that if a loan remains unpaid for 10 or 15 years, the effective interest rate becomes much lower.
This creates an unequal situation, as the interest rate depends on whether loans are being repaid. The prolonged debate in Bangladesh over the artificially low lending rate highlights the deeper issues of using interest rates to promote and structure investments.
Sobhan noted that political patronage has become the main criterion for lending, with political connections ensuring that loans are not effectively collected. This situation has empowered a particular class of people.
Earlier in the event, Biru Paksha Paul, a professor of economics at the State University of New York at Cortland and former Chief Economist of Bangladesh Bank, along with MM Akash, a professor of economics at the University of Dhaka, presented keynotes.
"The banking sector is paying the price of political favouritism toward the super rich," he said.
Biru Paksha Paul explained, to attract investment, interest rates were capped at 9% for loans and 6% for deposits. Business leaders told the prime minister that lowering the interest rate would lead to more investment.
However, this was just a justification, and investment levels remained unchanged. The Finance Ministry tried to defend the cap by claiming it would boost private investment, but there was no significant improvement, as shown by the private investment to GDP ratio.
Instead, the cap allowed people to siphon off funds from banks at nearly zero real interest rates.
The banking industry is suffering as a result of political favouritism for the wealthy. This all began with the April 2020 implementation of the interest rate cap (6–9%). While it had nothing to do with Covid, the interest rate cap went into force during the pandemic.
Their covert goal was to obtain loans with real interest rates that were practically zero, and they succeeded in doing so, he also explains.
On the other hand, Paul added that Bangladesh was an exception when the world was reeling from high inflation and cutting interest rates. Bangladesh Bank did not increase the rates. The IMF eventually raised interest rates after the rest of the world began to cut them.
Former Chief Economist of Bangladesh Bank, Biru Paksha Paul, expressed concern over the expulsion of journalists, arguing there was no justification for stopping the flow of information. He highlighted several key points in his presentation:
The government’s borrowing from banks has been increasing due to its fiscal incapacity and a political philosophy that avoids taxing wealthy elites directly.
In the fiscal year 2022-23, the government borrowed Tk1.25 lakh crore from the banking sector, with 79% of this amount coming directly from the Bangladesh Bank (BB).
He explained that the injection of Tk1 lakh crore of high-powered money contributed to persistently high inflation. This high-powered money had a multiplier effect of 4.93 last fiscal year, leading to monetary expansion rather than absorbing banks' liquidity. Paul emphasized that such irresponsible borrowing was unprecedented in the country.
He also pointed out that the lack of timely monetary tightening by raising policy rates and the absence of fiscal tightening through higher taxes on the wealthy and reduced public spending have jointly fueled inflation.
MM Akash, a professor of economics at the University of Dhaka, said in his presentation that as of March, total defaulted loans stood at Tk182,000 crore.
However, when including rescheduled and written-off loans, the real figure exceeds Tk400,000 crore.
Akash explained that concealing the actual amount of defaulted loans makes political sense, as state agencies and other organizations capable of addressing the bad loan problem have been taken over by a network of corrupt politicians, bureaucrats, and businesses.
Akash also illustrated the growing involvement of businesspeople in the national parliament. He noted that businesspeople constituted 18% of the electorate in the 1973 legislative elections following independence.
This percentage rose to 24% in the 1973 parliament, 38% in the 1990 parliament, 43% in the 1996 parliament, 58% in 2001, 57% in 2008, 59% in 2014, and 61% in 2018.
He highlighted the significant funds taken out of the S Alam Group's Shariah-based banks, which subsequently disappeared.
Akash suggested making the post of the central bank governor a constitutional position, currently appointed by the Finance Ministry. He also called for an end to the finance ministry's control over banks and demanded the publication of a list of the top 100 loan defaulters to build public awareness.
The program was chaired by Md Tajul Islam, president of Samaj Gabeshana Kendra and former Head of the Department of Economics at Jahangirnagar University. It was moderated by Nazrul Islam, a visiting professor at the Asian Growth Research Institute.
