Weak policy actions and political influences have limited Bangladesh Bank’s ability to practice transparency in the financial area. Building a trustable banking commission is a call from all to rescue the banking sector from mishandling. A banking Commission is expected to be the ultimate resort to ensure the financial sector’s healthy growth and sustainability.

The long-enduring economic catastrophe has made forming a banking commission or task force urgent. The Center for Policy Dialogue has suggested forming a transparent, unbiased, and inclusive commission that will help monitor and identify problems in the banking sector and suggest comprehensive solutions.

However, no previous governments have taken any serious measures to form a banking commission. High loan default and money laundering have destroyed the core foundation of the banking system. People’s faith in the banking sector has been shaken, and the past government did not take sufficient measures to provide sustainable policy. 

Previous attempts to reform banking

In 1983, the government of Bangladesh started to privatize the commercial banks that were once nationalized. During the ’90s and 2000s, this reform was directed through the guidance of the World Bank and the IMF. In 2002, a banking reform committee was established. The National Commission on Money, Banking, and Credit was established in 1984, and a banking commission was formed in 1996. 

In 2003, the Central Bank Strengthening Project was established to supervise the banking sector. The same year, the parliament passed the Bangladesh Bank Amendment Bill, granting Bangladesh Bank autonomy. 

Despite all efforts, Bangladesh Bank could not act as an independent institution due to the never-ending political anarchy. The banking sector became a free money-making machine where the powerful could take as much money as they wanted without worrying about paying it back.  

Reform efforts resume

The interim government of Bangladesh plans to create a banking commission to reform the banking sector. The government has already implemented some crucial reforms to reduce policy failures and strategic errors.

The Chief Adviser, Dr. Yunus, and Bangladesh Bank (BB) Governor Ahsan H Mansur met at the Jamuna State guest house on August 19. They agreed to enhance liquidity in the foreign exchange market. For that, the band of the crawling pegs was increased from 1.0 percent to 2.5 percent. The purpose of crawling pegs is to provide sustainability, especially when currency is devaluing. With the increased band for the exchange rate, the flow of dollars will increase as the transactions begin to take place legally, leading to an improved exchange rate. 

Bangladesh has been witnessing high inflation for the last one and a half years. The skyrocketed inflation reached 11.6 percent in July from 9.72 percent in June. Food inflation reached 14.10 percent in July. Compared to inflation, the rate of wages did not rise as much. The government will continue a contractionary monetary policy to reduce inflation. However, it would take time to reap the benefits of inflation-curbing measures.  

Understanding the sector’s weakness

Bangladesh’s most vulnerable sector is probably its financial sector. Currently, sixty-two scheduled banks operate in the economy. Lack of good governance, planned corruption, and weak institutional management have resulted in many default loans from these banks. The default loan amount stood at Tk 2.113 trillion in June this year.

The increase in non-performing loans (NPLs) is perhaps the most detrimental to our economy. NPLs make funds more expensive while shortening capital, causing a bank’s return on assets, equity, and capital liquidity to fall in distress. 

Bangladesh had $48 billion in its foreign exchange reserves in 2021, which dropped to $20.46 billion on July 10, 2024. During the last three years, the Bangladesh Bank has sold nearly 33.91 billion dollars from its reserves, of which $7.62 billion were sold in FY22, $13.5 billion in FY23, and $12.8 billion in FY24. 

In the past three years, the taka has lost its value significantly. Dollar inflow is not increasing much due to low remittance earnings and insufficient exports. The dollar crisis has made banks hesitant to open letters of credit, hampering business and directly leading to a lower amount of imports. 

Bangladesh Bank said industrial raw materials and capital equipment imports decreased in consecutive fiscal years. Lower imports of raw materials create scarcity in the production market, which results in lower exports. Lower imports also affected private sector investments. 

The banking sector is now overwhelmed by plans and policies to reduce default loans, which have had insufficient results. As long as the banking sector remains under political influence and corruption, no clever planning can heal it.

The sector has manifold weaknesses, from appointing bank directors to granting loans to politically influential persons and renowned defaulters. Issuing bank licenses to corrupt individuals and sometimes not even maintaining international banking standards has become common. We saw different groups competing to have more control over banks, like the S.Alam group, which took over 8 banks single-handedly.  

Given the circumstances, a banking commission has become essential to thoroughly investigate the deeply rooted corruption and propose solutions to the challenges faced by this sector. To ensure effectiveness, a detailed blueprint and objectives need to be drawn. 

Structure of a successful banking commission

Steven D. Levitt and Stephen J Dubner–the American economist and journalist duo, gave a phenomenal example in the book ‘Freakonomics’ that can be applied to our country. In 1995, a criminologist reported that the rate of teen homicide in the USA would rise another 15% or double in the next decade. Regarding this situation, then President Bill Clinton gave a speech in which he said: “We know we have about six years to turn this juvenile crime thing around. And my successors will not be giving speeches about the wonderful opportunities of the global economy; they will be trying to keep body and soul together for people on the streets of these cities.” 

The teenage murder rate dropped more than 50% during these six years, breaking all anticipations. During the speech, President Bill Clinton did not propose groundbreaking policies or say anything about gun control laws. It was a pat on the criminals, ensuring them that better days are ahead for them and that they can leave crimes for a living. Similarly, any new policy or reformation taking place in Bangladesh needs to be benevolent to the people, and only then will the people run the wheels of the economy for the government. 

The banking sector’s objectives need to be transparent and well-defined. The report must state the sector’s current state and identify the influences behind these problems. The interim government should follow a strategic reformation plan that is impactful both in the long and short run. 

The proposed commission should study the regulations of the banking commission that was previously built in 1996, identify its flaws and successful implementations, and correlate them with the country’s ongoing socio-economic condition. 

The banking commission needs to be inclusive and independent. Healthy supervision and monitoring are necessary to increase the central bank’s authoritative power. If it runs under any influence, no amount of policies can change its luck. The database and reports also need to be authentic and free from fabrication. 

To resolve the dollar crisis, Bangladesh Bank widened the exchange rate band from 1 percent to 2.5 percent, encouraging more remittance inflow. As a result, remittance inflow bounced to $2.2 billion in August, 38% higher than the corresponding month of the previous year. The number of dollars sent from abroad was $109 million on August 20 alone. 

Undoubtedly, the increase in the remittance dollar rate from Tk 2 to Tk 120 is one reason for the increase in remittance flow. With this type of prudent decision, liquidity will return to the interbank foreign exchange market very soon, and the exchange volume will also increase rapidly.

Knowing where to apply the rules of economics in real life is extremely crucial. Conventional knowledge can sometimes be wrong. Policymakers and standard setters are expected to think prudently and make decisions that might seem risky to the short-sighted but sensible in the expert’s eye. One person’s vigilant decision can change the condition of a drowning economy toward a better and brighter future.

In a meeting with the finance adviser, Dr Salehuddin Ahmed, the UK High Commissioner to Bangladesh, Sarah Cooke, expressed interest in helping Bangladesh reform its banking, revenue, and capital markets. The British high commissioner keenly mentioned that they want to utilize the strong economic, trade, and investment relationship between the UK and Bangladesh to support the economic reforms happening in Bangladesh. 

The various foreign aid received by Bangladesh, such as bilateral aid, multilateral aid, food aid, commodity aid, and loan assistance, are often set on terms and conditions. In 2013, the external debt was $32 billion; it reached $100.6 billion in March this year. If foreign loan interest rates increase, the repayment amount will increase. Rational debt management is, therefore, extremely crucial to save the economy. A banking commission can work on building structural reforms in the financial sector where a sensible and justifiable loan repayment system can be practiced.  

The banking commission must be open-minded to various opinions and prepared to sit with important stakeholders for a more diverse perspective. Accepting ideas and criticism from trusted intellectuals, including researchers, writers, policymakers, economists, and potential youth bankers, can bring great economic changes. 

Organizing Q&A sessions with representatives of the general people can help earn their trust. The public has the right to know about banks’ latest strategies and policies. After all, Bangladesh belongs to all of us.  

Economists have long pushed for an institution that will help restore the economy. Think tanks believe a sustainable commission can recover the banking sector through eligible policy measures and thorough planning. 

If the banking commission can thoroughly investigate and suggest valuable solutions, then the effectiveness of the banking sector can be ensured. The interim government must allow the banking sector to operate freely to expect a fair and corruption-free sector. Only that way can we hope for a stable economic progression towards a better future.  

Zanjabil Mashkura is an Economics graduate from Dhaka University and a regular writer on national finance and economics. Reach her here: z.mashkura@gmail.com