Ensuring good governance in banking sector

Bangladesh's banking sector plagued by escalating non-performing loans and a liquidity crisis affecting both the state-owned and private banks remains a matter of grave concern. Characterised by systematic looting and plundering of state resources and a culture of wilful loan defaults and impunity, the financial sector suffered extensive damage during the deposed Hasina government's autocratic rule. According to an estimate by the Bangladesh Bank governor, at least Tk17 billion was siphoned off from the banking sector during that period. Rampant corruption pushed numerous banks to the brink of collapse, severely eroding public trust in the sector. When the interim government took over, restoring financial stability and salvaging the banking sector emerged as a top priority. One crucial step towards restoring good corporate governance and accountability in this sector is ensuring the incorporation of an adequate number of independent directors in all banks' boards.

To this end, in May last, the previous government had committed to the World Bank to ensure that independent directors would constitute at least one-third of the boards of state-owned banks within a year. This initiative was aimed not only to improve corporate governance but also to meet the conditions for securing $500 million in budget support from the World Bank. However, nearly eight months later, this critical reform remains largely unfulfilled. According to a recent Financial Express report, only one state-owned bank, Rupali Bank, has complied with this directive, while 12 other state-owned financial institutions - including six commercial banks, three specialised banks, and four non-scheduled banks - have failed to comply with the requirement. The authorities attributed this delay to the recent political transition and the interim government's focus on broader financial reforms. This rationale, however, does little to justify such prolonged inaction on such a vital issue.

The term independent director generally refers to a member on a company's board of directors who is independent of the company's shareholders and management. These directors are not employees of the company, do not participate in its day-to-day operations, and hold minimal company stock. This independence allows them to make impartial judgments regarding company affairs to enhance good corporate governance. Independent directors can play an important role by providing unbiased opinions to protect the interests of depositors. However, while state-run banks often lack independent directors altogether, private banks tend to appoint relatives of bank management to these positions. This practice undermines the very essence of independent directorship, as these individuals may be reluctant to challenge management decisions or prioritise the interests of the institution and its depositors. Consequently, when the board of directors makes decisions that go against the interests of the institution and its depositors, there is a lack of effective oversight and accountability. Therefore, the government and the central bank must ensure that both state-owned and private banks induct independent directors into their boards in sufficient numbers to help these important institutions run efficiently and effectively.

It must also be ensured that independent directors appointed in financial institutions are performing their duties and responsibilities without fear or favour. Addressing the challenges such as establishing good governance, restoring order to the banking sector, improving service quality, and resolving the issue of defaulted loans must be at the top of the agenda. Strict oversight and accountability are of paramount importance for curbing mismanagement and ensuring accountability in the banking sector.