The central bank has been given no authority in appointing independent directors to private banks under the recently amended Banking Companies Act.

The law, passed in parliament on July 14, stipulates that three independent directors be appointed to a private bank—a new provision of the banking law.

But it is the Bangladesh Securities and Exchange Commission (BSEC) that would give the final approval—and not the central bank, despite being the custodian of banks and depositors’ money.

If the bank has fewer than 20 directors, then the number of independent directors will be two.

The copy approved at the cabinet, however, had stated that each bank would get four independent directors; the BSEC would give consent to two directors and Bangladesh Bank (BB) the other two.

“The change came during a review by the parliamentary standing committee on finance ministry before the house passed it,” said a finance ministry official.

Khondker Ibrahim Khaled, a former deputy governor of the central bank, said it was the responsibility of BB—not the BSEC—to control the banks.

“It is wrong that the BSEC consent is essential for appointing independent directors. I will only say it has not been done professionally.”

The previous law, however, had no provision that private banks’ boards should include independent directors.
Some listed private banks had one independent director to look after the interests of shareholders, and their selection was decided by the stockmarket regulator under its law.

Banks officials were sceptical of the success of the clause, as the positions were filled by relatives of the regular directors.

“The independent directors would not be able to play an active and independent role and only further the causes of the directors,” said a high official of a private bank.

In contrast, around the world the independent the directors are appointed from a central bank list of professionals with expertise and academic knowledge.

The cabinet’s decision did not prevail in another situation as well. The bill that got the cabinet’s nod forbids an individual from being a director of a bank and a non-bank financial institution simultaneously.

But the amended law allows a bank director can be a director of an insurance company for two terms. This, however, conflicts with the Insurance Act, which stipulates that the director of an insurance company cannot be a director of a bank.

Many former BB governors said the government made significant compromises in several areas with the amendment of the act.

Take, for instance, the section in the act which gives the central bank the power to remove the managing director of a state-run bank but not the board.

Khaled, also a former chairman of Krishi Bank, said the central bank should have been given adequate power in controlling the board of the state-owned banks.

Former BB governor Salehuddin Ahmed said it would have been better if the maximum number of bank directors had been fewer than 20.

“That is why the central bank had recommended making the number 13. It is only logical to take consent of the central bank in appointing the directors to protect the interest of the depositors.”

Both the former central bankers, however, agreed that a number of amended clauses were good.

Bringing down a bank’s exposure to the share market to 20 percent of their capital and increasing the banks’ paid-up capital amount to Tk 400 crore, were some examples cited.

“If the provision had been in force earlier, the share market crash in 2010 would not have happened,” said Khaled, who led the stock market probe committee.

Copies of the amended act were distributed among the banks’ managing directors on Monday, who were instructed to relay it to their respective boards and notify BB after implementation.