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Banking sector challenges in Bangladesh

Mamun Rashid
The banking industry in Bangladesh has flourished over the years, making double-digit profit
percentages, sustaining growth and surviving cut-throat competition while providing attractive
returns to shareholders. However, the greed for more without befitting platform and fundamentals,
brings its own challenges and questions in people's minds.
News about bank directors and chairmen's involvement in politics and underhand deals using banks'
goodwill raises question about the banks' independence in running their operations. It also makes
you think whether all the disclosures in the annual reports and other regulatory paperwork are only
the glowing shell over a huge hollow.
I at times question myself whether excessive regulation is the reason behind the veneer of goodness
or whether there are other regulatory malpractices, disconnects or deficiencies that allow these
banks to take advantage of the situation.
The image of the banking industry has many times tarnished by several stories regarding the owners
in recent media releases. Despite the considerable progress made, foreign countries are still
somehow treating our banking industry activities as questionable.
Countering the image issue is not the only block in the road to developing a respectable and
successful institution, there are also the problems of 2 Ps 3Cs and a T-- people, product, compliance
and ethics, competition, change management and technology among others.
Though someone may differ, competition in Bangladesh seems to be the deadliest of all. It not only
brings in positive developments, but also encourages malpractice. There is competition not only
from other banks but also from non-bank financial institutions (NBFI) and micro finance institutions
(MFI).
Not only are the institutions competing, the regulators and customers are also pitting one against
the other, making the situation extremely difficult giving you the feeling of being stuck between a
rock and a hard wall. A customer will often try to make the best out of the situation by not
complying with the regulatory requirement, referring to the service provided by another bank or
banks.
The requirement of bankers to meet steep targets often results in succumbing to the demand of
these corporates, resulting in bypassing of the regulation. One bypass results in another and then
another resulting in a whole network of malpractices, which often becomes the norm.
Competition in the banking industry is also hitting from the capital market end, with the corporates
increasingly going to the equity market to raise funding. This not only hits the banks in the belly by
affecting their core business, but also indirectly affects their contribution to market cap, which
dropped from 59% in 2007 to less than 25% in June 2010. More importantly it forces them to risk
their position by over exposing them to volatile capital market through proprietary trading and
position taking in order to maintain profitability.

All of us feel that the banking industry badly needs skilled human resources who will not only service
old products but will also create and launch new innovative products. Educating the market remains
the first requirement towards creating new products and developing skilled human resources.
Besides people and product issues, you need to be ever vigilant about the ever-changing technology
and regulatory requirements.
The new offering in the market which has got all banks running are the requirements of BASEL II &
Automated Clearing House. The major challenge with change of regulation is that often the
regulators are in a hurry to implement a sudden decision, rolling out action plans without proper
research or understanding the broad implications and capabilities of the banks to comply with it.
The outcome is delay in implementation, confusion among stakeholders and new techniques to
bypass these regulations. This in its turn creates a non-level playing field for those who comply with
the regulation versus those cleverly "managing" the situation without having to comply. Too much
noise and less action, at times, creates doubt about the sincerity of the purpose.
As a law-abiding citizen you wonder why it is so easy to "manage" non-compliance? The final
question remains -- who is losing out by this? Ultimately, every citizen of the country, as our country
suffers. The banking sector could be our pride and a major growth engine of the economy.
Regulators are taking appropriate decisions to implement proper regulations at the right time.
An appropriate example is when several financial institutions shifted towards the riskier capital
market to counter the lower growth in their core businesses using the depositors money, the
regulators aptly stepped in to make merchant banks separate subsidiaries. The regulations are there.
The problem is enforcing them in an honest manner.
If the regulators and the legal system were honest then all these recurring image issues and
malpractices could have been avoided. Facing the challenges head-on in a compliant manner should
be our goal towards creating a sustainable, profitable and forward-looking banking sector. We need
to do more and run faster with clear visibility about the destination. Perhaps, it also has to do a lot
with the overall governance and accountability situation in the country.