What is the purpose of bank merger?

Hollywood is famous for making thrilling bank heist movies, several of which have earned a place among the best ever made. However, the real-life bank heists that have taken place in Bangladesh are just as astonishing, if not more. Over the past 15 years, hundreds of billions of taka have been siphoned off from multiple banks, pushing many to the brink of collapse. Powerful individuals responsible for these embezzlements have reportedly used the money to acquire luxury homes, hotels and businesses abroad, living in opulence while the banks they looted struggle to survive. For a time, the interim government made efforts to recover the lost money. But with little to show, the authorities now seem to have lost interest in the chase. 

Now, the same authorities are shifting their focus to merging some of these weak banks under the Bank Resolution Ordinance. Reports suggest that five struggling Islamic banks may soon be consolidated into a large Sharia-based bank, primarily intended to finance small and medium enterprises (SMEs). The government even plans to inject initial capital into this new entity.

But why is the government stepping in to rescue these failing banks, and with taxpayers' money? After all, banks are fundamentally businesses that either profit or incur losses. The key difference is that they operate with other people's money. Like any other business, banks can and do fail. This is a relatively common occurrence in Western financial systems. For instance, in the United States, 568 banks have failed since 2000, averaging 25 closures annually. The worst years were 2010 and 2009, which respectively saw 157 and 104 failures.

Generally, governments refrain from intervening when private banks succeed or fail, as such outcomes are considered part of the risks inherent in private enterprise. Intervention typically occurs only when a bank or financial institution is deemed too big to fail, that is, its collapse would have severe repercussions for the broader economy. A well-known example is Lehman Brothers in the United States. The government's decision not to bail it out triggered a liquidity crisis, widespread panic and a major global economic downturn. In contrast, none of the banks that Bangladesh Bank is now considering for mergers and initial capital support pose such a risk. This naturally prompts the question about the justification for pouring in public funds for their rescue.  

Among the five banks slated for merger, four were under the control of the S Alam Group, representing a single business family. They are First Security Islami Bank, Global Islami Bank, Union Bank and Social Islami Bank. The fifth, EXIM Bank, was operated by a businessman closely aligned with the previous government. In Bangladesh, banking regulations limit single-family ownership to 10 per cent of a bank's shares. Yet these individuals found ways around to gain majority control. Once in charge, they are alleged to have siphoned off billions overseas using methods like manipulating trade values where export prices were reported lower and import prices higher than actual. 

Collectively, these banks hold Tk1.45 trillion in deposits but have loaned out Tk 2.15 trillion, covering the shortfall by borrowing from Bangladesh Bank and other sources. A large portion of these loans went to related parties. In fact, 90 per cent of Union Bank and Global Islami Bank's loan portfolios went to S. Alam Group, and are now classified as bad debts. Similarly, 70 per cent of loans at First Security Islami Bank and 20 per cent at Social Islami Bank went to the same group. Meanwhile, 10 per cent of loans at EXIM Bank are tied to businesses associated with its former chairman. Banking regulations prohibit lending more than 25 per cent of a bank's capital to a single borrower. This is a safeguard to protect against excessive risk. So, what were the regulators doing when these individuals made a mockery of that limit? How many red flags were ignored for these violations to occur? Reports suggest that S Alam used these funds to build overseas business ventures worth billions. Given the scale of this self-serving lending, the collapse of these banks was only a matter of time. 

The current struggles of these banks are undeniably the result of failures by both banks themselves and their regulators. In the end, people reap what they sow. There is no getting around it. The same principle applies to the consequences facing the banking sector. The pressing question now is what the central bank's decision to merge five banks will actually achieve. After the merger and the injection of public funds to restore the newly formed entity, can anyone guarantee it won't once again become a target of political plunder? Have the necessary lessons been learned to prevent a repeat of past mistakes? Without fundamental reforms in the banking sector and strict enforcement of accountability, mergers alone will amount to nothing more than a temporary fix.  

There are also serious concerns regarding Bangladesh Bank's policy guidelines on bank mergers. According to the policy, directors of a weak bank or financial institution may return to the board of the merged entity after five years, provided they meet certain conditions. These are often the same people who drove their banks into crisis, and this provision effectively grants a form of immunity by allowing their return after a brief absence. It is imperative that individuals who contributed to the plundering of banks face the consequences of their actions, rather than being given a chance to repeat them.

To bring about a real change, the old playbook must be discarded. Change in the banking sector demands reforms that put structural safeguards in place, mechanisms that would actively prevent violations of single borrower exposure limits or avenues for misinvoicing. Loopholes, after all, are invitations for abuse. Only when such protections are firmly established can bank mergers be expected to produce lasting, positive outcomes. Otherwise it is simply setting the stage for another collapse.

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