In banking and financial institutions, delineating powers and responsibilities as stipulated by the law often sets the framework for effective governance. In accordance with these legal provisions, it is management that should wield the decision-making authority, while the board of directors typically focuses on formulating and implementing the bank's overarching policies.
However, the practical implementation of such a structure within the country's banking sector is found to be severely lacking.
Many national banks have seen the board of directors assuming an overwhelming role, with influential managers wielding extensive control. Rather than adhering to their intended role in policy formulation, these directors are actively involved in all facets of the bank's operations.
This includes functions such as loan disbursement, letter of credit issuance, personnel recruitment, and policymaking, traditionally the management authority's domain. In essence, bank officers -- including high-ranking executives -- are primarily responsible for deposit collection instead of playing a substantive role in crucial decisions.
The situation within second-generation private banks operating on Islamic principles is even more concerning -- top executives within these banks often perform nominal duties and have limited decision-making authority. Allegations suggest that their responsibilities are largely limited to approving files presented by junior officers favored by the chairman. These junior officers wield significant influence within the organization.
Despite top executives and senior officials' widespread concerns and frustrations in more than two dozen private sector banks, many remain reluctant to voice their grievances openly. The fear of job loss or potential repercussions due to accusations of irregularities and corruption has created a culture of silence. Some have even voluntarily taken on roles as personal assistants to bank chairmen or directors, adding to the perception of compromised independence within the sector.
This issue extends beyond individual banks, with the managing director of a third-generation private bank anonymously revealing that the primary responsibility of bankers has shifted towards facilitating loans for influential managers and establishing benami (anonymous) companies to obtain loans. This practice has even led to cross-bank lobbying to secure loans when not attainable within one's institution.
Anis A Khan, former chairman of the Association of Bankers Bangladesh (ABB), lamented the decline in the autonomy of banks run by experienced bankers. He emphasized that the directors have assumed unmitigated power in many cases, with a select few wielding disproportionate control. This concentration of decision-making authority among a limited group of influential directors undermines the role of the board of directors and necessitates a shift toward more independent governance.
The presence of genuinely independent directors within the sector is critical to mitigating the influence of unscrupulous directors. Khan called for increased representation of independent directors who are free from affiliations with bank entrepreneurs or their employees. The current prevalence of such affiliations diminishes the prospects of meaningful reform within the banking sector.
This issue is not isolated to a single bank or a handful of institutions; it extends to a considerable portion of the private banking sector. The reported amount of visible loans held by private bank managers is around Tk2 lakh-crore. However, indirect loans, such as those taken under benami entities, surpass this figure. Additionally, the banking sector grapples with an extensive non-performing loans problem, with distressed loans totaling about Tk 4.5 lakh-crore, including defaults, rescheduling, and restructuring. Most of these distressed loans are associated with private bank managers and entrepreneurs, who frequently benefit from rescheduling agreements.
Corporate governance issues are not limited to private banks; state-owned banks have also faced allegations of unethical interference by their board of directors. Past scandals, such as the Sonali Bank Hallmark scam, have drawn attention to such issues, with unethical board interference coming to the fore. To address these challenges, it is imperative to strengthen the governance structure and ensure that the role of the board of directors adheres to established policies and guidelines.
The ongoing economic challenges, including currency fluctuations, have made leadership and authority within private banks appealing to prominent business figures. Corporate groups increasingly seek to establish themselves in bank ownership, contributing to a surge in new private banks. This competition is driving prominent industry groups to vie for seats on the boards of existing banks, further complicating the issue of board interference.
In conclusion, the need for a clear demarcation of roles and responsibilities within the banking sector, as outlined by the law, is essential to restore good governance. The existing situation, where influential managers and directors exert undue influence, compromises the integrity of the sector. It is crucial to enforce transparency, accountability, and professionalism in banking operations and to empower bank MDs to perform their roles independently, as mandated by the law. Only through a commitment to robust governance can the banking sector regain its reputation and stability.
Apurba Mogumder is an Associate at FM Associates Bangladesh.
