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The undue political influence in our country's banking sector has created deep systemic voids already and slowly pushing the fundamental stability of the banking system at risk. The state-owned banks, one-third of the private banks and specialised banks all are slowly moving towards an uncertain future. The non-performing loans (NPL) are increasing at alarming rate which are mostly contributed by the state-owned banks and the poor performance of new banks in the sector. The recent hostile takeover of Social Islami Bank Limited (SIBL) by a particular business group raises concerns. This business group has already, according to media report, taken control of nine banks and its next likely takeover bid could be on Dhaka Bank, based on trade volumes and expert analysis.
Bangladesh has more than 50 financial institutions as banks. Considering the size of our economy and financial sector, local and international experts have suggested for long to reduce the number of banks rather than allowing such proliferation. Even then, the Finance Minister is reported to have personally requested the Bangladesh Bank (BB) this year to approve two new bank licenses. Is our central bank capable to be the watchdog it is supposed to be, instead of being dictated by parliament and ministries?
Role of the central bank has always been important in the modern economies. This is especially so, given the outcome of Federal Reserve's inaction during the bank-runs of 1930s that prolonged the great depression in the United States. And contrastingly extraordinary steps have been taken by the Federal Reserve after the 2008 financial crisis to minimise the effect not only in the United States but globally as well. Similarly, the BB by principle is the de facto authority that should manage the banking sector and implement monetary policies to address such financial issues and regulate the banking sector. Given the recent activities involving the banking sector and the Bangladesh Bank, it is important to explore the independence of our central bank.
Central Bank Independence (CBI) is a fundamental concept that ensures the institution's autonomy to carry out its responsibilities. The idea of CBI has existed for a long time, but globally the modern practice started in early 1990s. The concept requires the government to handover the monetary authority to unelected body based on their expertise. Concept of CBI does not align with the democratic philosophy, hence most modern economies created check and balance system to ensure accountability. Transparency of the central bank has been a matter of debate. It seems the central bank's policy decisions can be either non-transparent with strict forward guidance or transparent with broad forward guidance. In the latter case, experts opine that broad forward guidance in effect is not proper forward guidance.
The central bank should ensure that there is no conflict of goals due to political pressure. Monetary policy goals should not be compromised to meet fiscal policy goals for political gains. To achieve its goal central bank should be sheltered from all kinds of political influence. For instance, a government might propose an expansionary monetary policy for short-term employment increase before election and to balance fiscal deficit through monetary policies. These kinds of policies due to political pressures marginalise the policy instruments which results in higher average inflation and hence, unsustainable long-run price stability. In Bangladesh banking sector, political pressure or lack of right kind of pressure sustains corruption, poor performance and the default loan culture.
What should be emphasised is that a central bank can have independence as an institution but sometimes not independence in creating its monetary policy. What drove politicians to give up control over monetary policy in other countries? It was the realisation that an independent central bank system and its governing body members are better suited to regulate the banking sector, deliver lower inflation and most of all not to compromise monetary policy goals to meet fiscal goals. Research showed that the degree of control politicians can exert over central banks varies greatly across countries, and is related to soundness of the banking system, overall financial stability and inflation outcomes.
The significance of a central bank's independence cannot be overlooked but emphasising independence over effectiveness in reaching its outcome would not be objective as well. The issue of a central bank's independence depends on its effectiveness in balancing the money supply, maintaining price stability and regulating the scheduled banks, etc.
Considering the above context for Bangladesh's banking sector, this writer presents the following satirical observation:
This week should be considered a "milestone" for Bangladesh's banking sector - the Parliamentary standing committee approved the 'Bank Company (Amendment) Bill, 2017' to be up for vote. These amendments will allow four members of a family to be in a bank's board of directors and raised the tenure term of directors to nine years from six. Bangladesh's democratic culture currently in practice promotes a limited-managed democracy in favour of development. Considering that the reform in the banking sector under the same philosophy is the right step to ensure our banking sector's future is just as promising as our country's system of governance.
The parliamentary standing committee on finance commented that if this proposed bill is passed, then the banking sector will become more family-centric. In that case, the banking sector should have considered these reforms much earlier, particularly in view of what the critics say about the family-centric culture being dominant in the country's political system. State-owned banks and private banks with this amendment will become more efficient!
Our political body, incumbent monetary authority and interest groups for the private banking sector all condone political influence on the Bangladesh Bank. Independence of a central bank is a concept that does not conform to the prevailing political milieu. Against this backdrop, it is no surprise that the concerned stakeholders have all taken active measures to ensure that they become their own watchdog.
If this situation continues, then in the near future the de jure and de facto control of the banking sector might make it easier for the monetary authority to pursue goals suiting such stakeholders that may run afoul of the interests of the people.
The writer is an Archer Fellow, Lee Kuan Yew Scholar.