Rising risks in Bangladesh's banking sector

Rising risks in Bangladesh's banking sector

Bangladesh's banking sector is always in public discussion and debate mainly centre around corruption and irregularities. This rot from within has turned most state-owned banks loss-incurring and also weakened a few private commercial banks. Barring the Oriental Bank in 2006, the country did not see any major crisis in the banking sector until 2008. Even the deeply-troubled Oriental Bank was somehow saved as the central bank dissolved its board of directors after detecting massive corruption, and appointed administrator in 2006. In August, the central bank also floated a tender to dispose of the major stakes of the bank. Later in 2008, the bank was renamed ICB Islamic Bank. Many depositors of the former Oriental Bank have yet to get back their money, however.

In fact, the government in Bangladesh always provides some shields to prevent any bank from getting liquidated. Even a problem bank which was almost insolvent due to irregularities and wrong business polices had the bailout. Farmers' Bank is a vivid example. The bank came into commercial operation in 2013. Within a few years, it came to the brink of collapse when irregularities involving funds worth Tk 35 billion had been unearthed. The government, through the central bank, intervened. Four state-owned commercial banks along with a state-owned investment corporation purchased 60 per cent of the bank's shares at Tk 7.15 billion in 2018. The bank has also been renamed Padma Bank through the resurrection bid. Some big irregularities in a few more banks have surfaced in recent months, sparking further debate about the real health of the country's banking sector. In the last month, an unscrupulous group allegedly withdrew some Tk 20 billion in loans from Islami Bank Bangladesh Limited (IBBL) using two companies that only exist on paper. In total, the group reportedly extracted Tk 90 billion from three banks, including (IBBL), in the name of loans and advances without proper documentation and verification. The news came as a huge shock the banking sector which, for long, has long been troubled by huge non-performing loans (NPLs), loan scams, capital flight, and weak regulations.

The most alarming thing is that IBBL, is the largest private bank well-known for its strong financial position and sound banking activities for the last four decades. The bank is the pioneer in Bangladesh, as well as in East Asia, in terms of Shariah-compliant banking. It has the second-largest network in the country after the state-owned Sonali Bank. IBBL has also introduced many diversified banking services to attract the largest volume of remittance and disburse the same to the beneficiaries.

The trouble with the bank actually started after a big change in ownership and management in 2017 through a questionable process which was criticised by many. A big industrial group and its associates became the largest shareholder of the bank. In the following years, financial performance of the bank has started to deteriorate.

The latest loan scam involving some banks is, however, not an isolated incident. If anyone closely examines the banking sector's situation in the last decade, it may be clear that a pattern has developed regarding embezzlement of big chunks of money from different banks by a number of groups. New or fake companies were opened to seek bank loans without proper documentation. Politically influential persons were appointed to the board of directors. Bank officials were forced to overlook lack of papers and other shortcomings while examining loan applications. Political pressure is often mounted on the central bank to avoid inspections and monitoring.

The net outcome of all these has been the siphoning off funds worth billions of taka from a number of banks and financial institutions. The marauding had started with BASIC Bank, which otherwise was a sound state-owned bank. Around Tk 45 billion, according to an estimate, had been embezzled from the bank in the name of loans during 2009-2013. The Anti-Corruption Commission (ACC) lodged a raft of cases against a number of former directors, bank officials and clients. Little progress has been made so far. Four industrial groups allegedly misappropriated Tk 130 billion from Janata Bank and another group defalcated Tk 35 billion from Sonali Bank. There were also some more such incidents.

 The list of the scams is not small and the amount of misappropriated money is quite big. That's why many have termed it 'plundering of banks.' All these misappropriated money turned into default loans and increased the financial burden of the banks. The banks have become further vulnerable. The unveiling of alleged loan forgery in IBBL appears to be a big blow to the country's financial sector. This will surely create a crisis of confidence among the depositors. The government has rightly asked the agencies concerned to initiate probe into the alleged loan scam.

Already, depletion of foreign- exchange reserves and shortage of dollars in banks have compelled the central bank to restrict some imports. Exporters are facing some difficulties to open letters of credit. Inflow of remittance in the official channels has ebbed. The government has negotiated with the International Monetary Fund (IMF) to get a loan support of $4.5 billion to overcome a looming crisis. When the country is facing turmoil on the foreign- exchange market, troublesome news in the country's banking sector has made things even worse.

In the Financial Stability Report 2021, Bangladesh Bank said that the banks and FIs would remain moderately resilient to different shock scenarios. "The stress- test results indicate that loan concentration to top large borrowers and considerable level of NPLs in some banks could concern the overall financial stability. Proper corporate practice in following the guideline on large loan/single-borrower exposure would be helpful to reducing the risks on banks' exposure to large corporate or to speci­fic group, sector or region."

The statement shows that the central bank is aware of the risks and troubles facing the country's banking sector. Nevertheless, regulatory monitoring and intervention to curb the irregularities is still weak. Unfortunately, the weakness of the central bank has intensified the risks and vulnerabilities in the banking sector.

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