Finance Minister AMA Muhith again captured media headlines by saying the central bank has lied to the IMF about its independence. He said, other than the selection and firing of state-owned bank directors, the central bank calls the shots on everything in the country’s financial sector, especially banks. However, the central bank seniors and a few of their well-wishers still feel that the watchdog agency should be given full control of the state-owned banks just like private commercial banks.
I was lecturing at a training session on trade fraud. In the question and answer session, a bank executive asked me: “Sir, could an independent central bank have helped avoid the Hallmark scam?”
Considering the recent debates sparked over the central bank’s independence and few central bank seniors raising some objections, I wanted to avoid the answer. However I could not. Though I always felt that an independent, strong, and effective central bank could play a significant role in improving the overall banking environment in the country, at the same time, I don’t think that central bank’s autonomy had much to do with the Hallmark scam.
Unfortunately, we had to swallow a lot of “knowledge donations” regarding the possible causes of the Hallmark episode from people without adequate knowledge on international trade, risk analysis, risk management, bank limit, audit, governance, or information technology in banking or financial institutions.
Any humble student of banking could say Hallmark is a glaring example of the failures of our banking sector. It showed the control failure in state-owned commercial banks. The head office didn’t have enough control over the branches, and didn’t have adequate knowledge about what was really happening in the branches.
It also demonstrates non-compliance with the procedures of “accommodation bill” and bill discounting under bank limit. Nobody was keeping track of the transactions happening within the same group entities under Hallmark in the same branch of a state-owned bank and the continuous diversion of funds to other banks.
Local banks are happily taking exposures under bank limit on another bank without analysing the underlying fundamentals, strengths, or weaknesses of the respective banks. Nobody in the bank branches, as well as the head office, were monitoring the outstanding amounts against the bank limits and some people even thought that they could take any risk on Sonali Bank because it is a government of Bangladesh undertaking.
The documentation, as well as validation process, in “local or domestic trade” is very weak in Bangladesh. In many cases, letters of credit are established after the goods have been shipped in order to formalise the payment process. Banks are increasingly becoming subservient or captive to big business groups, in most occasions drawings by the large groups are heavily in excess of their overall sales numbers or turnover.
Most importantly, banks are not in command of the required and relevant information due to absence of the right information technology platform, or because of a weak management information system or inappropriate record-keeping process. While banks’ lending capabilities are constrained by a percentage of their capital and reserve, the large clients can enjoy a “loan festival” without any relevance to their capital and reserve.
Added to these were of course the lack of accountability in the state-owned banks, politicisation of the board, and maybe the entire banking system including weak or no human resource development practices and performance management culture.
Strong control over the CEO and board appointment process of the state-owned banks might have helped the central bank to dictate timely submission of the returns, put up a proper audit plan on them, or even impose a better asset-liability management plan. But I don’t think it would have helped a bank like Sonali Bank to avoid a scam of this magnitude.
We need a better risk appraisal culture, data processing, mining, and analysing capability with well-trained human resources to detect or protect fraud or risk managers to identify and mitigate transaction risks in order to make sure we do not encounter further surprises like Hallmark.
Who does not want the central bank to enjoy autonomy to formulate an effective monetary policy, or even in a transition economy like Bangladesh to achieve respectable supervisory strength to protect the depositor’s interest? Having said that, I would rather put my money more on the banks to improve their human resources, rewrite their transaction or audit manuals or checklists, ensure establishment of a proper risk appraisal and approval process with an effective information technology delivery platform, and, more importantly, make sure that the internal control and compliance process is working.
We also want our central bank to improve their “offsite supervision,” increase the use of technology in bank supervision, and, more importantly, their senior officials to start learning and appreciating the “practical way” of handling international trade transactions and large loans or treasury management.
However, one important thing needs to be remembered by all concerned – no matter how much we improve our systems, process, or platform, nothing can stop fraud and forgery in banks unless we recruit better people, who are capable but non-controversial, in senior positions in regulatory, supervisory, business planning, and development affairs.
We have come a long way in the last four decades or so. Reforms have worked to some extent for our financial sector. Now we need to get our act together, look beyond our personal interest, and learn from our mistakes to build a respectable banking sector.
Central bank independence only on paper and closing the banking division at the Ministry of Finance may not be enough.
