The central bank of a country has the most significant role in governing its banking sector. It is the principal issuer of notes, banker to the government, banker to banks, deciding the monetary policy and controller of credit. It also maintains a stable exchange rate.
In order for it to perform said tasks effectively, it has to be able to run autonomously. Critics say that is not the case for the Bangladesh Bank.
The Banking Company Act, 1991 empowered the Bangladesh Bank to regulate the country’s banking sector as an autonomous body.
However, the central bank has lost its independence after the Ministry of Finance established its own banking division, said senior officials of Bangladesh Institute of Bank Management (BIBM).
“A few days ago, the central bank turned down proposals for setting up two new private commercial banks. In response, the ministry instructed them to prepare primary courses that would allow parties to get licences to set up private banks. How does such an action leave any room for the bank to operate independently?” said a supernumerary professor of BIBM, requesting not to be named.
Dr Toufic Ahmad Choudhury, director general (DG) of BIBM, said: “In our research on banking industries around the world, we have not found any example of a robust banking sector without a strong central bank system. If you want to turn things around, then strengthening the position of Bangladesh Bank is of paramount importance. The Ministry of Finance or any other specialized commission taking over is not the answer.”
Also Read- ‘Good governance can resolve banking crisis’
Toufic went on to explain how the government needs to communicate with the central bank if they feel there is an issue with its operations. It is only then that the bank can look into the issue and find a solution, he added.
“Putting the central bank on the sidelines and forming other bodies to perform its tasks is not going to work. Such action is not going to take us down the road where we will successfully be able to build a robust banking sector.”
He further said the Ministry of Finance controls the appointment of board of directors, managing directors and deputy managing directors for the state-owned banks of the country, as well as their budgets, but when there is trouble, the central bank is held responsible.
Ironically, though the central bank is supposed to regulate the operations of the state-owned banks, it is the government, in charge of running the state-owned banks, that heavily regulates the central bank's operations instead.
A top executive of Bangladesh Bank, on condition of anonymity, told the Dhaka Tribune: “Legally, central banks are meant to operate independently. The reality is very different.”
He said government agencies formulate their policy without consulting the Bangladesh Bank. For example, a ministry can decide whether more credit should be disbursed to a specific sector, even though the central bank has an entirely different monetary policy.
Khondkar Ibrahim Khaled, former deputy governor of the Bangladesh Bank, said: “There is a legal limitation on the Bangladesh Bank as it is not able to regulate state-owned banks. This is how you give room for corruption to take hold and run rampant. The central bank should be empowered to regulate both state-owned and private banks. It can do so if the government abolishes the amendment of Section 46 of the Banking Company Act.”
There are two reasons why the central bank system is failing in Bangladesh, as per Khaled. “One is external political pressure; the other is a lack of accountability and honesty, coupled with failure to establish a system to tackle such dishonesty.”
The former deputy governor says that even in India, no government appointed ministers can call the governor of the Reserve Bank of India for a meeting. The governor is only called by parliament or parliamentary committees to address financial issues. “In our country, the Bangladesh Bank governor visits the Secretariat once or twice a week,” he added.
“I am not saying that these meetings are bad, but it tarnishes the image of the governor. I feel this culture of calling the governor for a meeting should stop. By doing so, it will motivate the officials of the central bank to work more diligently and independently.”
Salehuddin Ahmed, former governor of Bangladesh Bank, said: “Autonomy of the central bank is necessary for proper functioning of the banking sector. Full autonomy would turn the central bank into a dynamic regulator and supervisor of the country’s financial institutions. Full autonomy does not mean lack of accountability; a system that keeps a check on accountability is essential.”
Salehuddin told the Dhaka Tribune that he told policy makers not to form a banking division before his departure from Bangladesh Bank and that monetary policy cannot be properly implemented if the central bank does not enjoy full autonomy.
He further said the officials of the Bangladesh Bank also have to be more assertive with their existing authority and, if they face any obstacles in doing so, they have to address the issues properly.
According to the Bangladesh Bank executive, there is a leadership crisis and the right people are not being appointed as the chief of Bangladesh Bank.
“The central bank has to work in association with the Ministry of Finance. We found one of our governors who got involved in a conflict with the ministry, while another one was submissive to the ministry. For the post of governor, we want someone who is able to work constructively, someone who is not surrounded by controversies and who is unbiased,” he told the Dhaka Tribune.
Is it time for BB to have full autonomy?
In recent times, private banks have faced hostile takeovers, whereby some managing directors were forced to resign. In such scenarios, the central bank was powerless to intervene and lead such banks in times of crisis.
However, when asked about it, Prof Syed Ahsanul Alam Parvez, chairman of Dhaka-based think tank the National Bureau of Economic Research (NBER), said it was not the right time for the central bank to have full autonomy with the existing governing body.
“In recent times, there have been many incidents where central bank officials, including the top executives, were found to be involved in corruption and failed to maintain stability in the financial sector,” he told the Dhaka Tribune.