Mismanagement and banking sector reform

For nearly two decades, Bangladesh's banking sector has remained under persistent public scrutiny. While weaknesses in governance and financial discipline are not new, the scale and frequency of mismanagement have intensified markedly over the last 10 to 15 years. Rising non-performing loans, repeated governance failures, and declining public confidence have turned banking reform into a national concern.

Calls for reform are now widespread. Yet meaningful reform cannot begin without first addressing some fundamental questions: What are the real causes of this mismanagement? Where exactly are the loopholes? And who should be held accountable?

Having spent a significant part of my professional life with one of the country's leading private banks, I find much of the public discourse inadequate. Too often, analysis is conducted by those outside the operational realities of banking. This article seeks to contribute an insider's perspective, based on experience rather than theory, by examining the roles and failures of regulators, supervisors, management, and boards of directors, and by explaining why the sector has reached such a fragile state.

A REGULATORY STRUCTURE THAT EXISTS, BUT FAILS: Banks in Bangladesh operate under a multi-layered regulatory framework: (a) The Banking Companies Act, administered by Bangladesh Bank; (b) The Companies Act 1994, as public limited companies; and (c) The Bangladesh Securities and Exchange Commission (BSEC) Act 1993, as listed entities.

In addition, listed banks are subject to scrutiny by the country's two stock exchanges. In theory, this multi-tiered oversight should ensure transparency, discipline, and accountability. In practice, it has failed to do so.

Banks are expected to be run by professional management in compliance with the Banking Companies Act, Bangladesh Bank's BRPD circulars, and BSEC and stock exchange regulations, under policies formulated by boards of directors. To understand why the sector is in such poor financial health, we must critically examine how each layer of this framework has fallen short.

BANGLADESH BANK -- AUTHORITY WITHOUT ACCOUNTABILITY: Bangladesh Bank is the primary regulator and supervisor, conducting both on-site and off-site supervision through multiple departments, including inspection departments, the Off-site Supervision Department, and the Integrated Supervision Management Department (ISMD), established in 2016.

The central question is straightforward: Has this supervision been exercised with sufficient diligence?

Oversight That Is Not Enforced. Banks are required to submit the minutes of their Board and Executive Committee meetings, including details of loan approvals and sanction conditions, to Bangladesh Bank within seven days. This requirement becomes meaningless if these documents are not carefully reviewed and acted upon.

Had these minutes been examined rigorously, many irregularities and policy breaches could have been detected before loan disbursement. A significant portion of today's non-performing loans could have been prevented. Mandatory reporting serves little purpose if the information is merely collected and archived.

Control Over Leadership. Bangladesh Bank approves the appointment of all Managing Directors and Directors and holds the authority to remove them. Directors themselves cannot remove a Managing Director without regulatory consent. More recently, Bangladesh Bank has begun issuing lists of eligible candidates for Managing Director and Independent Director positions.

Given this level of control over bank leadership, responsibility for systemic failure cannot rest solely with boards or management. When authority is so extensively centralized, accountability must also extend to the regulator.

LEGAL AMBIGUITY AND THE CULTURE OF BLAME-SHIFTING: Board Versus Management in Loan Decisions. The Banking Companies Act and BRPD circulars clearly stipulate that directors shall not be involved in loan sanctioning. Credit proposals are reviewed by management committees and forwarded by the Managing Director, who provides explicit assurances of due diligence and regulatory compliance. The board's role is limited to approval or rejection.

Yet when loans turn bad, blame is almost invariably placed on non-executive directors, while the management that originated, vetted, and recommended the loans largely escapes accountability. In contrast, in state-owned commercial banks, where directors are government appointees, management accountability is more frequently enforced, suggesting a troubling inconsistency in applying the law.

Independent Directors Without Risk. Independent Directors receive fixed monthly remuneration, in addition to the meeting fee, along with various informal benefits. Despite this, they have recently been exempted from legal prosecution for banking lapses.

This raises a fundamental question: If Independent Directors are compensated as professionals, why are they shielded from professional accountability? Independence without responsibility weakens governance rather than strengthening it.

Management Short-Termism. BRPD circulars restrict boards from interfering in recruitment and promotion, vesting this authority almost entirely in the Managing Director. With Managing Directors typically appointed for three-year terms, many use this power to recruit loyalists.

Since a loan usually takes several years to become non-performing, the Managing Director responsible for sanctioning risky loans often leaves before consequences emerge. The burden then falls on successors and the existing board. The short-term MD exercises greater control over the bank's most vital asset, its people, than the long term focused Board.

Fiduciary Duty. The Companies Act and corporate governance guidelines affirm that non-executive directors have no management role; their responsibility is fiduciary. Unfortunately, in practice, many directors have little understanding of fiduciary duty or its implications.

This confusion is compounded by vague laws and circulars that fail to clearly define the responsibilities and liabilities of the Managing Director, Chief Risk Officer (CRO), Head of Credit, Chairman, and directors. The problem is further aggravated by the fact that banking laws are often drafted by bureaucrats with limited exposure to operational banking, rather than by professionals with practical industry experience.

WHAT THE BANKING COMPANIES ACT MUST ADDRESS: If the forthcoming amendment to the Banking Companies Act is to be meaningful, it must introduce clarity and enforceable accountability.

Key reforms should include: (i) Clear definition of management roles and liabilities; (ii) Balanced accountability for Chairmen, Non-Executive and Independent Directors; (iii) Removal of legal indemnity for compensated Independent Directors; (iv) Strengthening of board committees and governance functions; (v) Expand the definition of "Family" to include beneficial owners and entities exerting significant influence over a company to prevent circumvention of rules; (vi) Reduce the maximum percentage of shareholding allowed for any single Family or related owned company; (vii) Reduce the number of directors allowed per family; (viii) Tighter controls on lending concentration; (ix) A mandatory debt-equity ratio for borrowers; and (x) Zero tolerance for fraud, with mandatory reporting and legal consequences.

RESTORING TRUST: Bangladesh's banking sector will not regain stability or public confidence through cosmetic reforms or selective blame. Only a clear, enforceable, and operational legal framework, one that holds regulators, management, and boards accountable alike, can address the root causes of mismanagement.

Without such reform, the sector risks repeating the same cycle under different leadership, at an ever-increasing cost to depositors, shareholders, and the wider economy.

The writer is former chairman of a leading private bank.