The Finance Minister AMA Muhith has said that the state-owned banks should be privatised. He’s entirely correct in this. The next two questions people ask are: Well, who should they be sold to and at what price?
The correct answer to those two questions is: It doesn’t matter at all.
Obviously, we don’t want to sell them to out and out crooks, but other than that, who owns an asset like a bank is a matter of no import at all.
What is much more important to us all is that we have an efficient and effective banking system, and that’s something we’re only going to get from a private sector system.
We can see the importance of this from the reactions of governments in 2008. There was serious concern that the banking industries of Wall Street and the City of London were going to collapse into piles of smoking rubble.
Anything and everything was legitimate in making sure that didn’t happen. No, not because the world must be run for bankers, but because having a financial system is an essential first step in having a functional economy in the first place.
It doesn’t take much looking around the world to see that places without such a banking system are poor.
The reason is what it is that banks and a banking system do for us -- something called “maturity transformation.” We deposit our savings in them -- which is the same as the bank borrowing from us -- but we also insist that we should be able to take our cash out any time we want to.
But out there in society there are people who need to be able to borrow money for a longer period of time. Someone looking for a mortgage might need the money for 30 years, a company investment might need it for five.
So we need a mechanism by which those short-term savings can be changed into those long-term loans. That’s the transformation, and the banks do it by that borrowing short and lending long. The American economist Brad Delong insists that this is actually the definition of banking: If you do this you’re a bank, if you don’t you’re not.
This is entirely vital for the economy, for without it we’d only be able to finance investments for as long as people wanted to save. We thus need this done efficiently and effectively, neither of those two really being known as something we’re going to get from the government bureaucracy.
The finance minister is therefore correct, we want to get the banks into the private sector. But that does raise the question of who to sell to and for how much.
The answer being, as the Nobel Laureate Ronald Coase pointed out: We don’t care very much. Obviously, as above, don’t sell to crooks to the extent that they are a separate group from bankers.
For what Coase pointed out was that in a free market economy, the ownership of assets will flow to those who value them most. To those who can make the most profit from them, that is. If you can only make Tk 10 from owning something and I can make Tk 100 from owning that same thing, then I will be willing to pay more for the thing, no? So, assets end up being owned by whoever can make the most profit from them.
Equally, in a free market there is competition and that means that the profit cannot be made by gouging the consumer – that’s you and me – it must be made by being more efficient and more effective.
So, our assets will, whoever we first sell them to, end up being owned by those who can operate them most efficiently and most effectively. Which is what we wanted for the banking system, efficient and effective banks.
In theory, this could mean that we just sell the state-owned banks for Tk 10 each to whoever wanted them. Give it a little time for the market to work and we’d end up with them being owned by whoever could run them best, which is exactly the problem we’ve set ourselves at the start – how do we get the banking system for Bangladesh that we want?
Of course, in reality, we don’t quite do it that way. We’ve a handful of these banks so we make sure that we sell each one to different people. And we make sure that we monitor the market to make sure that we always have that competition, that no one can own several of them and thus create a monopoly.
We also don’t set a price for them. We have an auction and thus find out what people are willing to pay for them. And again, in a properly designed auction, we’ll get the best price from those who think they can run them best.
We want and need an efficient banking system because this is how to mobilise the savings of the country into the investment which will make us all richer. Thus we also want a private sector banking system as that’s the way to get the efficiency.
But who to sell the public sector banks to and at what price doesn’t really matter. Just auction them off and let the market sort that out.
Because, in the end, the market is the best system we’ve got for sorting out problems like that.
Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.
Thursday, June 04, 2026
