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Over the years, there have been talks on formation of an independent banking commission to review the status of the country's banking sector. Policymakers have hinted that such a commission would be formed to suggest remedial measures to overcome the crisis in the sector. In his budget speech in June last, the finance minister AHM Mustafa Kamal said: "We have heard for long about establishing a Bank Commission for bringing discipline in the banking and financial sector. We would discuss with all concerned in this matter and do the needful."
Last month, media reports suggested that the government has finally decided to form a banking commission headed by an eminent economist of the country. A leading think-tank, in its reaction, welcomed the move and put a set of recommendations to make the proposed commission effective. There is, however, still no headway in this regard.
Nevertheless, by expressing the willingness to form an independent commission, one thing is clear that the authorities have acknowledged that there are serious problems in the banking sector. Mounting default loan and gross misappropriation of depositors' money in the last one decade have pushed the banking sector to its present vulnerable state. Undue political intervention has made supervision and governance of the sector weaker. Allowing more banks to operate without providing any exit route has created unhealthily competition in the industry. Against the backdrop, the necessity of an independent banking commission appears justified.
PREVIOUS EXPERIENCES: The idea of banking commission or bank reform committee is not unique in the country. It was in 1986 when the government appointed a "National Commission on Money, Banking and Credit" to 'diagnose the malaise and identify ways and means for banking recovery.'
Later in 1990, the financial sector reform programme (FSRP) was launched under Financial Sector Adjustment Credit (FSAC) of the World Bank. The main objectives of the programme were to gradually deregulate the interest rate structure, provide market oriented incentives for priority sector lending, make subsidies in the priority sectors more transparent, improve the debt recovery environment, and strengthen the capital market.
Again, in October 1996, the government formed a Banking Reform Committee (BRC). Within a year, in May 1997, the government also undertook a Commercial Bank Restructuring Project (CBRP) funded by the World Bank. BRC, however, submitted its recommendations in 1999. Not all the recommendations were implemented.
Finally in 2003, another bank reform committee on classified loan was formed. The committed submitted a series of recommendations to address the problem of default loans. Almost all the recommendations regarding private commercial banks were implemented. The committee was, however, unofficially barred to provide any specific recommendation on state-owned commercial banks (then termed as nationalised commercial banks).
CONTRASTING VIEWS: Many believe that an independent banking commission will be critical to address the ongoing problems in the banking industry. Some, however, argue that there is little need for such a commission. The contrasting views on formation of the banking commission need to be analysed to understand the arguments.
Those who favour a commission pointed out that an independent commission will be able to take stock of the overall banking situation extensively. By doing so, it will ultimately prepare a detailed record of the irregularities in the banking sector. A formal record of the irregularities and wrong-doings by a government appointed committee or commission will be helpful to address the problems in a comprehensive manner.
On the other hand, those who oppose formation of commission argue that that problems and irregularities in the banking sector are well-known. Finance ministry and Bangladesh Bank may be asked to prepare a document of record in this regard. They also mentioned that the recommendations of the commission are not legally-binding. Implementation of the recommendations, no matter how good those would be, will entirely depend on the political willingness of the government. Instead of forming a commission, they argued, strengthening the central bank to perform its duty independently would be more effective.
Interestingly, both sides have some common views on the main causes of growing vulnerabilities of the banking sector, especially regarding undue political intervention and lack of good governance. Both also argued that without ensuring the good governance, it would be very difficult to fix the problems of the banking sector. The opponents of the banking commission thus argued that the government has to go ahead with strong political will to address the problems. Proponents of the commission argued that by forming the commission the government would be able to demonstrate its political will and it will give a strong message as to its resolve to mend the wrongs.
It is not clear whether the government has decided on the matter. Quick and clear decision is necessary. If the government feels that a banking commission will be helpful to deal with the banking sector problems, it should move ahead to form the commission with adequate authority. If not, it must find ways to deal with the situation in a way it considers appropriate towards addressing the problems that in most likelihood would keep growing in the absence of effective measures.