Bank directors’ tenure extension: What it means for the banking sector
Since the establishment of private banks in Bangladesh in the early eighties, various types of irregularities and corruption have been reported. Matiur Rahman and Syed Azizul Haque in their book titled, Dhonik Gosthir Lootpater Kahini (Shuchona Publisher, 1987), documented how the initial capital required for the establishment of the private banks was collected by taking loans from government banks in the name of industrial investment: "After the government's decision to establish banks under private ownership, 12 of the country's wealthy groups applied for permission, of which 9 were approved and then 6 banks were established. Fifteen directors of these 6 privately owned banks borrowed 125 crores from the state-owned banks in their name or their businesses till 1982. While the total capital of all privately owned banks is only 48 crores."
At that time, there were allegations of looting huge amounts of money in the name of loans against the directors of private banks. Matiur Rahman and Syed Azizul Haque reported that within just 15 months after its establishment, the National Bank Ltd was in great crisis due to mismanagement, irregularities, taking illegal benefits and exerting undue interference in the banking activities by the entrepreneurs/directors. At that time, 10 directors took Tk 34 crore loan from the bank anonymously. These events are also described in the book entitled, Shamorik Shashoner Doshoke, written by economist Anu Muhammad.
What is the current situation? After four decades of the establishment of private banks in the country, the situation has not improved, rather the looting of several crores of taka has been turned into the looting of hundreds and thousands of crores. The recent incidents like the losses of Farmers Bank and National Bank due to irregularities and corruption of the owners, LC fraud of Tk 16,000 crores in Social Islami Bank and the scam of taking loans worth Tk 30,000 crores from Islami Bank by the owner through illegal means are part of this continuum.
Banks are not like other private family-owned businesses. A paid-up capital of Tk 500 crore is required to establish a bank. After that, thousands of ordinary people deposit their savings in that bank. By investing only Tk 500 crore, the bank owners are able to control the deposits of thousands of crores of taka, decide where to invest it, and who to lend it to. So, to accumulate a huge amount of money by investing very little, one first acquires a bank license using political connections and then embezzles the deposited money under the guise of loans.
According to the policy of Bangladesh Bank, no bank director can borrow more than 50 percent of his total shares from his own bank. To overcome this "disadvantage," they either take loans from their own banks anonymously through relatives or by opening paper companies, or they loot loans from other public and private banks through mutual understanding and collusion. According to Finance Minister AHM Mustafa Kamal's disclosure at a question-answer session in the parliament in September 2020, directors of various banks took loans amounting to Tk 173,230.89 crore from their own as well as other banks which is around 12 percent of the total outstanding loans. But it is not clear how much of that loan is defaulted and how much is restructured or written off because the directors themselves exercise all kinds of authority from loan approval to loan restructuring or write-off.
Despite the mega serial of bank scams in the public and private banks in Bangladesh, instead of establishing proper governance and transparency, the opportunity of looting thousands of crores of taka by the bank directors has been widened through various legal and policy support. Amid intense pressure from the bank owners, the finance ministry in April 2018 reduced the cash reserve ratio (CRR) by 1 percent and also allowed the private banks and non-bank financial institutions to get up to 50 percent of the government, semi-government and autonomous bodies' funds which was previously maximum 25 percent. The government had also increased the tenure of bank directors from 6 years to 9 years before the 2018 elections.
This time, amid the strong objections of the opposition party, the amendment to the Bank Company Act has been passed by the National Parliament to increase the term of bank directors from 9 years to 12 years before the election as per the proposal of the bank owners. As a result, those who sat in the bank as directors in 2018, will not have any obstacle to remain as directors until 2030.
As reported by The Daily Star, the version of the bill that was first placed in the parliament by Finance Minister AHM Mustafa Kamal previously did not seek to amend the tenure of the bank directors. Neither did the parliamentary standing committee on the finance ministry make any such suggestion. The provision to extend the director's tenure was snuck in at the last minute after ruling party MP Ahsanul Huq Titu made the proposal, and the amended bill was passed by voice vote without further discussion or vetting by the concerned agencies like the Bangladesh Bank, the parliamentary standing committee on the finance ministry, the cabinet division and so on. The amendment passed in this way without any due diligence is a stark reminder of the lack of democratic accountability in the country. According to Prothom Alo, the written proposal of the Bangladesh Association of Banks (BAB), an organisation of private bank entrepreneurs and directors, to extend the term of the directors, was almost exactly submitted as that amendment by the member of parliament of the government party.
Paul D Hutchcroft analysed the banking experience of the Philippines in his book, Booty Capitalism: The Politics of Banking in the Philippines, and argued that the banking sector is a prism through which the political-economic character of a country can be clearly understood. His study highlighted the larger patterns at work within the political economy of the country – how a predatory oligarchy extracted privilege from a patrimonial state, and how developmental policy objectives were continually choked out by a clamour of particularistic demands made by those who currently enjoy proximity to the political machinery. Likewise, in Bangladesh, no institutional good governance has been developed in the banking sector like all other sectors of the country which allows the political elite to extract undue benefits from the states. The central bank's allocation of valuable privileges-whether they be bank licenses, government deposits, emergency bailouts, or loans-are not made on the basis of objective rules considering the benefit of the economy. The favour or disfavour of those power holders is a major determinant of the relative success or failure of particular banks.
The extension of the tenure of bank directors in the latest amendment of the Bank Company Act is part of this mechanism of patronising the private bank owners at the expense of national interest which will ultimately widen the scope of plundering the people's money deposited in the banks by the bank owners themselves.
Kallol Mustafa is an engineer and writer who focuses on power, energy, environment and development economics.