‘We moved from loan default culture to banking loot

 

‘We moved from loan default culture to banking loot’: Wahiduddin Mahmud

Bangladesh’s banking sector initially deteriorated because of a widespread culture of loan defaults, but after 2010, a more damaging trend of systematic financial looting emerged, former interim government adviser for Planning and Education Wahiduddin Mahmud has said.

“Although we had moved away from the culture of non-performing loans, a new culture of banking loot emerged after 2010. This is why the financial sector is in such a bad state today,” he said on Wednesday.

Mahmud made the remarks at the opening session of a two-day annual banking conference organised by the Bangladesh Institute of Bank Management (BIBM) in Mirpur, Dhaka.

Speaking about his experience with banking reforms, Mahmud said considerable efforts had been made in the past to introduce regulations, strengthen oversight and establish discipline in the sector. These initiatives helped bring some private banks closer to international standards.

However, he said the subsequent rise of banking-related financial misconduct was even more damaging than the earlier problem of loan defaults.

“Money was taken from banks without any rules,” he said.

Lessons from past banking reforms

Mahmud stressed the importance of learning from the country’s previous experiences rather than repeating past mistakes.

He recalled that private banks had been allowed to operate without an adequate regulatory framework, resulting in serious governance problems. At one stage, entrepreneur-directors borrowed amounts equivalent to around 35 percent of the total deposits held by their respective banks, he said.

He argued that clear rules should have been established to prevent a single business group or family from controlling multiple banks. Such practices, he said, should be addressed through antitrust regulations.

Mahmud also pointed out that Bangladesh still lacks a comprehensive antitrust or anti-monopoly law.

According to him, influential individuals with close ties to political governments have repeatedly used state-owned banks to distribute benefits and privileges to favoured groups.

He said political governments seeking to provide benefits for political reasons should consider options that would not cause substantial economic damage. Using the banking and financial system for political patronage, however, is inappropriate.

Political leaders must understand the consequences of such decisions, he said, adding that Bangladesh Bank and banking professionals have limited ability to prevent problems when political authorities interfere in the system.

New banks approved without proper scrutiny

Mahmud said the rapid approval of new banks after 2010, often without adequate scrutiny, contributed to the collapse of several institutions.

Some of those banks had accepted deposits from government organisations, he noted.

He said funds collected from teachers’ salaries, welfare schemes and pension contributions had also been deposited in banks that later became insolvent. As a result, many teachers, including those working at government-approved MPO-listed educational institutions, were left unable to access billions of taka in pension and welfare savings.

According to Mahmud, some of those funds remain inaccessible.

He attributed the present difficulties in the banking sector partly to the excessive relaxation of regulatory requirements over the past 15 years.

Calls for safeguards in bank restructuring

Mahmud acknowledged that some regulatory flexibility might now be necessary to help financially distressed banks recover. However, he warned that relaxing rules without adequate safeguards could recreate the conditions that led to the current crisis.

“Now, to rescue weak banks, some relaxation of regulations will again be necessary. But where is the guarantee that by relaxing regulations, we won't end up in the same bad situation as before?” he asked.

He recommended allowing banks to recover while ensuring that financial assistance reaches legitimate businesses and responsible entrepreneurs.

“Banks should be given the opportunity to stand on their own feet. However, in doing so, we need to maintain adequate safeguards,” he said.

Mahmud called for each case to be assessed individually to ensure that support is directed towards honest entrepreneurs and viable businesses.

Without such safeguards, he warned, the country risks repeating the same mistakes that contributed to the banking sector’s decline.

Senior banking and financial officials attend conference

The conference was also attended by Bangladesh Bank Deputy Governor Md Kabir Ahmed; Bangladesh Association of Banks President and Dhaka Bank Chairman Abdul Hai Sarkar; World Bank Regional Director for Bangladesh and Bhutan Jean Pesme; and Association of Bankers, Bangladesh Chairman and City Bank Managing Director and Chief Executive Officer Masrur Arefin.

Zaidi Sattar, chairman of the Policy Research Institute (PRI), a private research organisation, delivered the keynote address.