Now that a decision has been made to privatise these SoBs, as has been announced by the finance minister, delaying the process will simply cause lost opportunity for growth which the country needs badlyIt is this cross-subsidisation that is causing great harm to the economy, as banks can not reduce the cost of borrowing to the investors for financing new projects that would increase employment of more people and produce more goods and services; and hence increase GDP growth rate. This drag on the economy must be withdrawn to free other banks and the banking system to make their valuable contribution to economic growth. The rate of unemployment among the youth of the country (about 40% as noted by ILO) can easily influence some to engage in illegal activities including terrorism. Now that a decision has been made to privatise these SoBs, as has been announced by the finance minister, delaying the process will simply cause lost opportunity for growth which the country needs badly. The paper by Tim Worstall of Adam Smith Institute of London has narrated quite elaborately (and sometimes sarcastically) that why we bother who buys these banks. He expressed great confidence in the markets, except that we don’t sell them to crooks or to increase monopoly power in the industry. The paper quoted the Nobel Laureate Ronald Coase saying in a free market economy assets should flow to those who value them most; to those who can make the most profit from them. The main objective is to get the burden off the people. Earlier there were some efforts to sell those banks but it did not happen. Tim suggested conducting an auction on these banks and let markets sort that out as we have quite active players in the banking sector now. M Shamsul Haque is a professor of finance at NUB.
An efficient and effective banking system is essential to serve the country for the maximum benefits to the people. Banks are economic power houses and they create value for its clients -- borrowers and lenders; that ultimately translates into GDP growth. It is known that in the system of national income accounting, no value addition is derived from the banking industry as they simply transfer funds from depositors to borrowers, who need funds for longer term investment in projects.
For this valuable service, banks are allowed to be set up and operated on a very small amount of equity capital from the owners. Unlike other businesses in manufacturing and services, banks operate with about 10% equity and 90% debt, which is undoubtedly a risky structure and that is why banks are closely supervised by the central banks and market players.
As noted in the paper (mentioned below) from the reaction of governments in the financial crisis of 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.” Rescue efforts were undertaken through what was known as Quantitative Easing QE, injecting liquidity from the central banks. Those were private sectors banks with sound management structure and they repaid public money within a few years and restored the banking system to some degree of satisfactory operating conditions under much closer supervision by regulatory agencies.
A very interesting paper has been published in the Dhaka Tribune on April 2, 2017 on “Who to sell the state owned banks” in Bangladesh as they have been losing money for a long time. Not only that these banks have no capital of their own, but they have also been given funds from the annual budget of the government. Where does the government of Bangladesh get such funds to contribute to the state owned banks? It gets the funds from the tax the people pay for public services (not disservices as these banks have been engaged in scams); and we can also say it's from the tax that other banks in the private sector pay.
