Poor corporate governance in banking sector

Mostafa Al Hossaini | Published: September 19, 2018 21:44:53 | Updated: September 20, 2018 21:49:11

In the developed countries, stock market plays the key role in resource mobilisation through financial intermediation, but in the developing countries where efficient form of stock market is yet to flourish, banking sector has been playing a substantial role in that regard through transferring fund from surplus unit to deficit unit. Since independence the banking sector in Bangladesh has never been in good shape. Although operations of state owned commercial banks flourished across the country, mismanagement coupled with excessive political influence restricted their due role in the economy. 

On the eve of financial liberalisation, the first ever private commercial banks in Bangladesh started their journey in late 1980s. They did quite good in the first two decades but then they too started facing the challenge of increasing bad debt. The situation was getting even more severe from 2013 when government allowed four more private commercial banks in the already highly crowded banking sector, being politically influenced. In addition to this, the amendment of bank company act-2013 opened up doors to destabilise the financial sector. Since then, corporate governance in banking sector has become an issue of serious concern.

Good corporate governance is said to be the most valuable practice for the success of any business. Many view it as the cornerstone of any business. Ensuring good corporate governance can help companies avail all the opportunities that come their way, and to properly utilise the resources. Corporate governance failures have always resulted in massive problems. For example, in Bangladesh, there are scores of financial scandals where poor corporate governance was the main issue. Non performing loans, among others, have been too burdensome for the economy. Although 2.5 to 3 per cent NPL is considered normal in global scenariot, we observed average NPL rate of 27.10 per cent during 2012 to 2016 in Bangladesh. Lack of stringent rules and regulations, political interference and habit of not practising standards are worsening the situation.

Corporate governance is the prerequisite for effective functioning of the banking sector and economy as well.  Banks play a vital role in the economy by taking money from the savers and giving loan to the business firms that helps accelerate economic growth as well as financial stability. Soundness in the banking sector is the prime condition for financial stability.

There are some skill sets for bankers which are required to build professionalism. Analytical ability is a must for bankers in order to examine the capacity of a potential borrower of repaying his/her debt. Domestic and foreign macroeconomic variables and other uncertainties have to be taken into consideration.

Despite knowing the gradual rise of default loan since the last few years, Bangladesh bank appears not well equipped to reduce the rate of classified loans by implementing stringent rules and regulations. Moreover, monitoring mechanism of Bangladesh bank is not that much strong and effective to force the banks to follow proper rules and regulations. Moreover, like the central banks of other countries, Bangladesh bank doesn't hold the sole authority to take decisions independently rather they have to comply with decisions of ministry of finance. 

Under the circumstances, it seems that our private institutions are so powerful that they can influence the top level authorities to enact law in their favour. The recent incident of lowering cash reserve ratio is an example of such malpractice. It is high time we talked about these issues to be able to recover from this ongoing crisis in banking sector and thus restore investor's trust.

Good corporate governance of banks requires prudent regulations and attention to conflicts of interest. More disclosure of accurately audited publications would facilitate this. More rules, laws, policies, standards and practices must be introduced and maintained. Loan concentration must be diagnosed and controlled, at the same time more inquiries need to be done before disbursing loans to borrowers.






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