INTRODUCTIONThe problem of development is a continuing one. No country, be it developed or developing, can regard itself as having reached the peak of its growth effort. Attainment of the desired level of economic development is targeted by the developing economies for a number of reasons such as growing population, scarce resources, tall level of unemployment, backdated technology, low level of the standard of living, etc.
The process of economic development needs capital formation besides other structural changes like improvement in skill and efficiency of manpower, better organization, health and education system, etc. Capital development is deemed as the most noteworthy variable of economic development. A proficient and well-organized financial system contributes to the much-desired economic development through capital development which can be separated into three stages; savings, financing and investment. Banks are among the most crucial sources of short term working capital for businesses and have become increasingly active in recent years in making long-term business loans (Rose & Hudgins, 2005).
The main purpose of a commercial bank is to mobilize deposits and to provide loans to people and organizations to finance their consumptions and business activities. Thus banks embolden the flow of money to productive use and investment which accelerates the flow of economic growth (Ashraf Ali & Howlader, 2005).The fundamental objective of the banking sector is to provide total fortification to the depositors with their money and funds. Both businesses and individuals have the rights to be ensured with inevitability and security about their funds in the banks.
A smooth and acceptable public confidence and trust should be persistent and continually developed into more trusted banking system environment that can provide a high level of banking services all throughout the economy. In addition, to achieve total efficiency and competitiveness that can project a positive impact on the entire banking sector in the Bangladesh.HISTORIC VIEW OF BANKS IN BANGLADESHThe country moved away from state control to a relatively market-based open economy by adopting a major stabilization, liberalization and deregulation program under the influence of the World Bank and the IMF against the backdrop of serious macroeconomic imbalances in the early 1980s . After thecommencement of Financial Sector Reforms Program (FSRP) in 1990, the sector was opened to superior competition by the entry of new private banks and more liberal entry of foreign banks in line with the recommendations of this program.
But the improper surveillance, lax regulatory policies and improper power pressure from political personnel have led to a lack of discipline in the banking sector of Bangladesh. However, directed and inefficient credit allocation by the commercial banks of Bangladesh in various economic sectors without adequate credit evaluation and observing, inter alia, eventually led to the prevalent loan delinquency, and worsening health of the entire financial system.An endeavor has been made in this paper to scrutinize and gauge the nature and extent of involvement of commercial banks in development financing in Bangladesh using different performance indicators like branch expansion, deployment of savings, sectorial and regional distribution of advances, etc. In their noble effort of development financing, commercial banks are facing various problems such as mismatch of sources and uses of funds, extreme dependence on traditional collateral securities, politicization of credit delivery system, absence of sound legal system for recovery of loans, lack of government’s extension facilities in the form of data base, investment counseling, appropriate technology, infrastructure, marketing of products, etc.
The banking sector has received most intense condemnation and examination over the years due to lack of proper regulations and supervisory structures which led the banking sector into severe financial depression. With the banking conditions now of Sonali Bank Limited, Prime Bank, Premier Bank & Bangladesh Bank (Central Bank) with all those, issues that have been thrown into them due to the deregulation in the banking sector in the country. According to Alam (2012), if there is a proper implementation of banking regulations and supervision structures, definitely, banking efficiency and profitability would follow.FRAMEWORK OF THE FINANCIAL SYSTEM OF BANGLADESHThe financial system in Bangladesh is mainly composed of two types of institutions: banks and non-bank financial institutions (NBFIs).
The banking sector is supervised and regulated by the Bangladesh Bank (henceforth as BB), the central Bank of Bangladesh .(Figure 1) The banking sector aloneaccounts for a substantial share of financial sector assets, with 48 banks accounting for about 95 per cent of the sector’s total assets as of the end of December 2011. Since 2002, the domination of the banking system by the state-owned commercial banks (SCBs) has been declining while private commercial banks (PCBs) and foreign commercial banks (FCBs) have been gaining market share in both deposits and bank loans and advances (Bhattacharya and Chowdhury 2003), reflecting an increased competition in the banking industry. The market share of the SCBs declined substantially to 28.
75 per cent of the total industry assets in 2011 as against 54.4 per cent in 1990, while PCBs’ share rose to 65.24 per cent in 2011 as against 22.6 per cent in 1990.
Similarly, FCBs have also shown slight increase holding total industry assets over the last ten years. FCBs hold 6.0 per cent of the industry assets as of 2011.Figure 1 :- A brief overview of the financial system of Bangladesh REGULATORY BODY OF BANKS IN BANGLADESHThe regulatory body of all Banking Institutions in Bangladesh is Bangladesh Bank.
The banking structure of the business of BB has been entrusted to a 9 members’ Board of Directors headed by the Governor which is also the Chief Executive Officer of the Bank of Bangladesh. BB has 40 departments with 9 branches . Incorporated in the strategic plan of BB for 2010 to 2014 is the vision “to develop continually as a forward looking central bank with experienced and dedicated professionals of high ethical ideals, directing monetary management and financial sector supervision to maintain price permanency and financial system toughness, supporting rapid broad based wide-ranging economic development, employment generation and poverty obliteration in Bangladesh.” The BB functions as articulating and implementing monetary policy, overruling policies in the foreign exchange market.
At the same time, it is giving advice to the Bangladesh government on the interaction of monetary policy with fiscal and exchange rate policy. This is about the impact of various policy measures on the economy. The major objectives of the BB monetary policies include the price solidity of basic merchandises, sustainability, growth, ; expansion, high employment rate in the country, efficient employment of economic resources, and firmness of the financial system of Bangladesh.CURRENT SITUATION OF THE BANKING SECTORThe financial sector of Bangladesh is generally trivial and unfledged.
This sector consists of a banking segment and an emerging but still blossoming capital market segment, even though both are quite underdeveloped in international contrast. Ali (2005) states there is very limited scope for individuals to invest in the capital markets and lack of alternative opportunities for investment obliged them to invest mainly in bank deposits, post office saving certificates and government bonds. Banks operate with old and outdated banking procedures, lack of co-ordination between appropriate manpower planning and bank schemes, shortage of market research for customer analysis, scarcity of financial derivatives, inept banking services, and lack of long term planning to name a few are creating bottlenecks preventing local banks from attaining international standards. Financial institution managers in overall and bank managers in particular, in this country do not properly assess risks as well as the costs of various types of bank sources of funds.
While managing their financial assets, the financial institutions were not cautious about handling funds with the utmost care.Absence of ethics in the banking sector is a part of broader and stretched socio-economic and political hitches in Bangladesh literature. Loopholes in the financial sector are a part of the overall venality that plagued almost all sections in the country. Unhealthy competitions among different banks display lack of ethics in doing banking business.
The next part will bring to light some of the more drastic repercussion of such regularities in banking sector of Bangladesh.BANKING SECTOR; INSURGENCE OF CORPORATE CRIME IN BANGLADESHA crime is an act or omission that is against the law and punishable upon conviction. The branches of crime are numerous and quite complex. In general, the different types of crimes may be divided into two major categories, Personal Crimes and Property Crimes.
The classification of crime concerning our attention is the aspect of Corporate Crimes. White-collar crime that is part of a collective and organized effort to serve the economic interests of a corporation is known as corporate crime. In some cases corporate crimes are directed by bogus entities that pose as legal corporations or partnerships. Though corporations cannot be confined, they can be criminally punished with fines and other sanctions.
Existence of crime and corruption in Bangladesh are so commonplace that some people do not hesitate to consider them as hindrances to their daily lives; in fact, people in Bangladesh are quite accustomed and somewhat encouraged to take paths of trivial corruption at any chance to take advantage of the weak law and regulation prevailing in the country.The prevalence of corporate crime in Bangladesh , despite being antique have not come under much scrutiny before the act of several breaches of the Corporate Law in the form of frauds and embezzlement of huge amount of money from local banks by felony corporations such as Hallmark Group and Bismillah Group more recently. According to the corporate literature, Embezzlement is the act of dishonestly withholding assets for the purpose of conversion (theft) of such assets by one or more individuals to whom such assets have been entrusted, to be held and/or used for other purposes. ? THE BEGINNING OF THE FALL OF THE BANKING SECTORPoor management and ineffective supervision are relevant not only to the crisis of single institutions or to prevalent crisis affecting a significant proportion of a banking system, as would appear obvious.
They are also a major element in general financial crises that affect the whole system. Those crises may be caused by economic upheavals, inappropriate monetary or exchange rate policies and/or abrupt deregulation. In those cases, both good banks and bad banks can be found, depending on the quality of their management. In fact, good management may enable banks to survive and be reasonably healthy.
The following section will provide a timeline of events that signify a discipline deficit in the banking sector of Bangladesh.Figure 2 – Timeline of major setbacks in the Banking Sector during ’09-’13 THE TRENDSETTER; HALLMARK GROUP LOAN SCAM (MAY 2012)In May 2012, a report from the Bangladesh Bank revealed that the Ruposhi Bangla Hotel Branch of the state-owned Sonali Bank, Bangladesh’s largest commercial bank, illegally distributed Tk 36.48 billion (US$460 million) in loans between 2010 and 2012. The largest share, of Tk 26.
86 billion (US$340 million), went to the now infamous Hallmark Group. While the focus hasunderstandably been on Hallmark, other companies also participated in the fraud, including: • T and Brothers, Tk 6.10 billlion• Paragon Group, Tk 1.47 billion• Nakshi Knit, Tk 660 million• DN Sports, Tk 330 million• Khanjahan Ali, Tk 50 millionThis is considered to be the country’s biggest banking scandal.
It dwarfs earlier fraud cases, such as a Tk 6.2 billion Letter of Credit fraud in Chittagong in 2007, a Tk 5.96 billion fraudulent withdrawal from Oriental Bank in 2006, and a Tk 3 billion forgery scandal in 2002.BASIC BANK SCAM (NOV 2009-NOV 2012)Taking out loans with pretentious documents is so easy in Bangladesh that charlatans don’t want to miss out on any chance.
The issue has come to the fore again with a recent scam at Basic Bank that approved loans of Tk 4,500 crore, generally without apt documents and inspection. The bank’s board and top management were found to have helped the culprits steal the money. A Bangladesh Bank inspection found many irregularities in four branches of state-owned Basic Bank — Motijheel, Shantinagar, Dilkusha and Gulshan branches — that involved loans of nearly Tk 4,424.93 crore between December 2009 and November 2012.
Of the amount, Tk 1,594.73 crore was given by the Gulshan branch, and majority of the loans was issued without proper scrutiny. The bank gave loans to nonexistent companies and promptly approved loans to clients instantly after they had opened accounts. Moreover, the bank’s board sanctioned loans before the branch sent the proposal to the bank headquarters.
BISMILLAH GROUP SCAMBismillah Group fidgeted about Tk 1,100 crore from state-run Janata Bank and four private commercial banks — Prime Bank, Shahjalal Bank, Jamuna Bank and Premier Bank -– showing counterfeit export documents, taking government’s cash enticement to open business firms abroad and with lodged bills through Letters of Credit (LCs). The business group swindled Tk 392.57 crore from Janata Bank, Tk 306.22 crore from Prime Bank, Tk 163.
69 crore from Jamuna Bank, Tk 148.69 crore from Shahjalal Bank and Tk 62.97 from Premier Bank.BANKING SECTOR DISCIPLINE DEFICIT; UNDER THE MICROSCOPEIt is clear from the amount of money embezzled by the notable few groups mentioned above that the banking sector like most of the working sectors of the country are suffering from deep, inclined scathes of corruption.
The lack of regulation from the 4 banks through which the loans were sanctioned for Bismillah Group have breached the basic rule of providing loans as proper or no background checks were carried out while providing of loans of such high magnitude which questions the authorities of the banking institutions and the central bank’s regulatory control over the actions of the banks in Bangladesh. It is suspected that loans have been given to fake companies because of political pressure and collusion of dishonest bank officials. Directors of state-owned commercial banks employed on political considerations have allegedly played an important role in this regard. Millions of Taka has been withdrawn in the name of fake companies by opening local letter of credit.
Although many anomalies have been detected by the central bank, no retaliatory action has been taken against banks and bank officials. Letters have been given out to the chief executives of the banks several times. Despoliation of resources is taking place in state-owned commercial banks. Loans are being advanced in the name of fake companies.
There is minute prospect of recuperating such loans. Bangladesh Bank is busy with state-owned commercial banks and is barely able to inspect the private commercial banks for deficiency of manpower although indiscretions have also been noticed in private commercial banks. The banks are signing loan agreements without looking into supervision of liquidity problems. Permitting of risky loans due to political considerations is generating stress on liquidity.
The central bank has produced a detailed guideline for the management of banks. But this is not being followed. It is supposed that chairmen of the banks interfere in the work of the banks going beyond their authority. This is an abuse of central bank rules.
Because of a non-transparent and weak pecuniary system, we are not only losing foreign investment but we cannot invest our own resources in our development ventures. Our surplus resources are being transferred abroad. The foundation of our economy is wrinkled for deficiency of limpidity, accountability and lack of monitoring in our banking system. THE AFTERMATH OF THE CORRUPTIONIN THE BANKING SECTORThe performance of banks is vital to the individual consumers of bank deposit and loan services, stockholders, employees, government regulators, management and to the entire economy.
Generally speaking, bank performance is important to individual consumers of bank deposit and loan services as well as to the performance of the entire economy. The principal question now is whether the reform measures taken were successful or not. It is a matter of dispute regarding how far these reforms have been effective towards both the development of Bangladesh’s financial sector and the improvement in the banks’ performance, and what measures still need to be undertaken to eliminate the present impediments in the sector. The banking sector of Bangladesh has suffered dearly in wake of the recent scams by the likes of Bismillah Group, Hallmark Group, Destiny Group and others who have collaboratively swindled almost Tk.
100 billion in the last half a dozen years, which have left the whole economy in tandem given the already tumultuous situation prevailing in the Stock Exchange Market of the country. Such events have increased further pressures on the government and also the regulatory bodies of such industries as such examples of forgery and existence of corporate crime will dampen the already shady image of Bangladesh in the eyes of foreign investors; some European investors having already prohibited from investing after the Rana Plaza incident and Padma Bridge construction corruption. The ACC have already taken plans to stop corruption in the Banking sector and Bangladesh Bank have already shown signs of reformation through regulatory policies aimed at reducing the level of similar events by making it mandatory to perform proper background checks on individuals and institutions prior to sanction of loans and nullify the improper power exploit of political personnel in transactions. The future will imply whether the policies have been implemented properly or have been lost in transition.
RECOMMENDATIONSNo matter what posture the government may be taking it is virtually impossible to accept that such a scam could take place without the connivance and sanctifications of some powerful political bosses. In the interest of long term and the imminent general election, government would do well to separate itself with the corrupt and bring them to book after due process of law. In the ambiance of one of the worst banking scandals, the succeeding steps may be considered:1. Those who are in charge of economic management may adopt the ideal rule of “speak less do more” and “if talk do it in one voice;”2.
Momentous reforms are necessary in financial and banking management which, have been long unsettled. Finance and banking modifications commission may be set up.3. Bangladesh Bank’s capability for effective, objective, apparent and responsible bank supervision may be heightened, including extension of professional staff, allowance of its authority over the NCBs and adoption of a separate pay scale.
4. The dogma of scapegoat suspension must be reformed to keeping the defendants in position for a specified period under stringent instruction to recuperate the defrauded money or at least to arrange credible collateral of substance.5. The society may depress media test in favor of swift and operative inspection to point out the guilty.
CONCLUSIONIt is quite apparent that to build up an effective and efficient banking system to the highest yearning level computerized transaction is indispensable condition but not the sufficient condition. For proper running of the banking systems, corporate governance is anticipated at maximum level. Banking business is a business of conviction. People deposit their savings in banks assuming that the banks would protect their savings through productive lending.
A scam in the likes of Bismillah Group could have triggered panic among savers leading to a herd-like withdrawal of deposited money from the institutions concerned. The ruling government has to take the swindle seriously in case the swindle affects its reputation in the eyes of the public who voted them into power. The Government has not generated the scam but generally it is the government who gets the denunciation from the public for this kind of scam. Finally, the central bank should further strengthen its supervision and monitoring divisions.
