Sadly, bad ideas persist through changes in government.
One of the major problems that the banking system had under the last system was that who may borrow was determined by politics. This led to many being able to borrow because they were politically favoured and then, as always happens in such cases, repayment was not insisted upon.
There are, therefore, a number of banks in the system which are, effectively, not able to repay everyone. The money's in the pockets of those previously politically favoured.
The new system does not do this, and that is good. It's -- as far as the banking system is concerned at least -- rather the point of having this new system.
But now we've the Bangladesh Bank trying to determine the price at which people may borrow. This is not as appallingly bad as who may borrow without repaying, but it's still a very bad idea.
“The central bank set a limit on the maximum interest and charges that banks can charge for short-term trade financing in foreign currencies.”
This should not be done.
We can see the idea behind it. Trade financing affects both importers and exporters. Within the Bangladeshi economy the larger companies involved have a certain amount of economic -- and thus political -- power.
They might well think that life for them would be better if they had to pay less money to the banks for their trade financing. They would be right too -- less money going to the banks will mean more profit for them.
But this wholly misses the other half of what will happen.
Smaller companies trying to get into import and export will find they cannot gain access to trade finance at all. For this is what happens with maximum prices being set.
The fees on such trade finance are the price, yes. As it happens, the interest rate on -- say -- a letter of credit isn't the important part of the price. Rather, it's the fee charged for having one at all. That's just the way that part of the financial market works.
We do not want the banks financing stupidities. This is even discussed in Adam Smith's Wealth of Nations -- the people willing to pay really high interest rates are the very ones you do not want to lend to. Because they're the people making projections which are almost certainly not going to come true.
But it's also true that there is a spectrum of what are acceptable risks. Acceptable in that a slightly greater risk of failure is met by a slightly higher cost of finance and across a portfolio -- a number -- of such risks it does indeed all work out.
So, what happens if there is a maximum price -- of interest or fee? That means that all those things -- new firms, new ideas perhaps -- which are slightly riskier than this price will pay for cannot gain finance at all.
Maximum prices for finance benefit the large firms already in the industry, whatever that industry is, but kill off the access to finance of the new, upstart, and innovative companies which make the economy grow.
Now, it's true that I'm against price fixing of any kind. Always and everywhere. So, I am biased. But fixing the price of finance stops the new from gaining finance and protects the old and large companies.
Why would we want to do that? It's obvious why the old companies want it and why the banks would be against it. But why would we, out here, want that result?
We don't. Therefore it shouldn't be done.
We even have a way of sorting this out. As long as we have enough banks offering trade finance -- enough suppliers to make it a free market thing -- then we don't require price fixing at all.
If a bank tries to charge “too much” then the customer will simply go elsewhere and be charged less.
Just the same as when we buy rice at the market -- no one can force us to pay “too much.” Maximum prices for finance mean that riskier, but still sensible, projects just cannot gain finance. This is not a good idea.
Tim Worstall is a senior fellow at the Adam Smith Institute in London.
