Financing long-term investments

Warning against burdening banks

Experts, politicians deplore dysfunctional state of capital market

FE Report | Published: June 25, 2018 09:53:04 | Updated: June 28, 2018 10:34:20

Planning Minister AHM Mustafa Kamal addressing a post-budget dialogue organised by the Centre for Policy Dialogue (CPD) at a city hotel on Sunday — FE photo

The financial sector of Bangladesh has developed a dangerous notion called 'mismatch of maturity', as short-term deposits are used for financing long-term investment here, eminent economist Dr. Rehman Sobhan opined on Sunday.

"The entire burden of investment for structural change in the economy as well as the private sector has fallen on the commercial banks, which is very unusual and very dangerous," he cautioned.

"Historically, long-term investment finance is largely provided by the capital market and the specialized financial institutions dedicated to long-term investment," Mr. Sobhan said at a dialogue on the latest budget in the capital.

"These are the institutions, specially designed for risk taking for undertaking long-term investment."

"But with the stock market being non-functional as a source of long-term investment, the commercial banks, which depend on deposits of the short-term investors, are now bearing the full risk of undertaking financing long-term investment," he added.

"Now we see a dangerous element in our financial system - the concept known as mismatch of maturity - where you are using short-term deposits for financing long-term investment."

"This is the crisis which has been lingering for the last ten years, and which is likely to be carried over the next ten years, if it is not addressed properly," he cautioned.

Mr. Sobhan's views were echoed by President of Metropolitan Chamber of Commerce and Industry, Dhaka (MCCI) Nihad Kabir.

She observed that a dysfunctional capital market and uncertainty in the financial sector are hampering the private investment.

"New good companies don't want to come to the capital market. We do not see anything there to make it an effective source of capital."

"There is a significant regulatory failure there," she added.

Focusing on the banking sector, Ms. Kabir said, "There has been a sharp decline in the growth rate of deposit in the banking sector from 19.4 per cent in the fiscal year (FY) 2012 to 9.5 per cent in September 2017, while it is currently around 10 per cent."

"This sort of deposit growth rate cannot sustain a private sector growth rate of 16 to 20 per cent."

"Interest rate, on the other hand, hovered in between single-digit and 16 per cent within the span of two months. This sort of uncertainty does not enable the private sector to work with any sort of efficiency," she noted.

Former Commerce Minister Amir Khasru Mahmud Chowdhury, in his speech, opined that the budget has failed to address the growing income inequality in the country.

"At least five per cent people of the country have accumulated unlimited amount of wealth in the last few years."

"They have even invested heavily in the property market abroad. Bangladeshis are now (one of the) large contenders in the property market of London and Dubai."

"The government needs to identify them and impose tax on their foreign properties," he added.

"The banks have been looted in such a way that those banks are now short of deposits. Billions of taka have also been looted in the name of mega projects."

Mr. Chowdhury also called for abolishing the Banking Division and providing enough autonomy to the central bank, so that it can operate without any interference.

"The Banking Division should be abolished, and the central bank should be empowered to do its job independently," he opined.

Planning Minister A H M Mustafa Kamal, who attended the programme as the chief guest, opined that the banking sector and the National Board of Revenue (NBR) are in need of urgent reforms.

"We have to reform the banking sector, and we have to strengthen the central bank."

"We will reward those who are good bankers and will punish those who are at fault."

"It will take only two months to resolve the problems and bring necessary discipline in the banking arena," Mr. Kamal observed.

"We will also reform the NBR to bolster our revenue generation capacity."

Noting that the tax rate in Bangladesh is higher than many other countries of the Asian region, the planning minister said, "We need to lower the corporate tax rate to bring more investment and make the country more attractive for business."

"We also have to expand our tax net to bring more people under it," he added.

State Minister for Finance and Planning M A Mannan also spoke on the occasion.



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