The economy of a country has been mainly driven over the past few decades by FIRE (Finance, Insurance and Real Estate) sectors. Accordingly, these sectors experienced ebullient growth and formed a major portion of the overall economy. The banking sector especially, has evolved into one of the main pillars of economic growth. However, after the recent financial crisis world-wide, the importance of the banking industry to the economy appears to be dimming slowly. From the recent reports in the various media it is observed with serious discomfort that the banking sector of Bangladesh is plagued dismally with corruption, and some state-owned commercial banks (SCB) are beset with loan scandals that were carried out by some fraudulent and graft-prone companies.

The banking sector of Bangladesh is called the backbone of the economy and needs to be taken care of for sustainable economic development and growth. The banking sector is an increasingly important area that plays critical roles in the economy such as mobilisation of savings, capital formation, 'monetisation' of the economy, promotion of employment, poverty alleviation and uplift of the poor, promotion of entrepreneurship, rapid economic development, and safety of wealth and remittance of money.

The most complex and difficult question now is how to control, contain and reduce corruption in the banking sector. There are multiple achievable ways to combat and control corruption in the sector. Recent analyses and studies conducted by experts, economists and professionals advocate "strong and effective internal control system" and "establishment of the rule of law" that can remedy corruption as well as act as a deterrent to corruption in this sector.

Effective internal control system in the banking sector is a must. This can help ensure that the goals and objectives of a banking organisation will be met, that the bank will achieve long-term profitability targets, and maintain reliable financial and managerial reporting. Such a system can also help ensure that the bank will comply with laws and regulations as well as policies, plans, internal rules and procedures, and decrease the risk of unexpected losses or damages to the bank's reputation due to corruption, baloney and malpractices by the employees of the bank.

In most of the SCBs, and also in PCBs (private commercial banks), effective and strong internal control system does not exist. As part of the internal control system the duties and responsibilities of the staff and managers need to be epitomised and everyone must do his/her jobs accordingly. Every SCB has managers, assistant general managers (AGM), deputy general managers (DGM), general managers (GM), deputy managing directors (DMD) and managing director (MD) to perform day-to-day banking businesses. The duty and responsibilities of these managers, DMDs and MDs should clearly be defined and the Boards of Directors of the SCBs should oversee the performance of these managers.

The corruption that happens in the SCBs is generally detected after some time by the internal auditors, auditors from the central bank, the Bangladesh Bank (BB) or by the government commercial auditors. This is just like 'post-mortem' of cases. If effective internal control systems are in force, the occurrences of corruption and fraud could be detected at the initial stage. When a document is prepared or when a transaction takes place, under the internal control system, it is to be checked and verified by a senior manager and the irregularities, if any, should be detected by the supervising manager.

In addition to department managers, there are many committees, sub-committees and consultants in the SCBs and PCBs, namely audit committee, compliance and audit department, accounts department, audit consultants, accounts and engineering consultants who are involved with day-to-day operations of the bank.

Their responsibilities are to check and verify and express their views and opinions in banking operations including sanctioning of bank loans - short term, medium and long term, disbursement of loans, realisation of loans, checking and verification of the loan-related documents. If these departmental heads and the World Bank-paid consultants performed their jobs perfectly and properly, the fraudulent devices and transactions would be detected. "The internal control system in the banking industries is out of order and does not work," so said Dr Akbar Ali Khan recently.

Sonali Bank Ltd is an SCB and it has all the above-mentioned elements of internal control system. If the internal control system were active, the Hall-Mark loan scam would have been detected long time back. Tk 36 billion (3600 crore) was embezzled and siphoned off by Hall-Mark not in a day or two. It took a long period to get the money by back-to-back L/C, bills discounting, bills purchase, etc. During this period, what did the highly privileged and highly paid MD, the Consultants, Audit Committee Members and the Board of Directors, including its Chairman, do? Why did it take two years to detect the fraud by the regulator's auditors --- that is BB Auditors?

Some borrowers from manufacturing industries managed to get loans from two commercial banks by mortgaging one piece of land with two commercial banks, and, finally, the loan became a 'classified one'. The two commercial banks came to know about the facts when the loan became classified. This reflects the most 'ineffective' and 'corrupt' internal control system in the banking sector of Bangladesh.

The Board of Directors of the bank is responsible for introducing effective and strong internal control system in the banking industry. The Board of Directors of a bank provides governance, guidance and oversight to the senior management. Board members should be professional, objective, capable, and inquisitive, with a knowledge or expertise of the activities and risks run by the bank. The Board should consist of some members who are independent from the daily management of the bank. A strong, active board, particularly when coupled with effective upward communication channels and capable of financial, legal, and internal audit functions, provides an important mechanism to ensure the correction of problems. The Board of Director should realise the importance of effective internal control system as banks handle billions of Taka that belong to individual depositors, businesses and other entities. Internal bank controls ensure that account holders can safely deposit money with banks without the risk that a bank employee might misuse the money or put it in jeopardy by recklessly investing it. Additionally, the bank internal controls are required to ensure that the bank employees comply with the laws of the land and the rules, regulations issued by banks and the central bank.

The board of directors should include in its activities (1) periodic discussions with management concerning the effectiveness of the internal control system, (2) a timely review of evaluations of internal controls made by management, internal auditors, and external auditors, (3) periodic efforts to ensure that the management has promptly followed up on recommendations and concerns expressed by auditors and supervisory authorities on internal control weaknesses, and (4) a periodic review of the appropriateness of the bank's strategy and risk limits.

In Bangladesh banking sector, we unfortunately find that non-professional, inexpert personnel of low academic background are dumped into the Board of Directors with political backing. At the senior management level also one may find many who are working as DGM, GM and DMD in both the SCBs and PCBs with qualifications in different areas other than finance, banking, commerce and economics.

The central bank and the government of Bangladesh (Ministry of Finance) should come up with specific guidelines to control the banking sector effectively by forming the Board of Directors with dynamic people of integrity, professional and excellent academic background.

Some economists opine that business organisations like banks should be run keeping in perspective the business point of view, and not the political one. And no politically-driven appointments should be given to anyone as a member of the Board of Directors of a bank. The central bank should also give guidelines about the qualification and experience of the senior management of banks. A mere circular or a memo is not enough. Whatever circular the central bank issues, it must be implemented and followed by the SCBs and PCBs, and its audit and inspection teams must verify the appointments of the senior management of the banks. There should be some penalty clause in the BB circular for the violators and offenders of the circular.

Finally, the issue of establishing the rule of law to save the banking sector in Bangladesh. Corruption is deep-rooted and permeates the whole society including the banking sector, which is known as the 'life blood' of the economy. Only the establishment of the rule of law, enforcement of laws in every sphere of life can contain corruption. The legal system of Bangladesh ought to be amended and modified so that no offender, irrespective of one's political, social and financial status, can slip out of the punishment for his/her offence.

Without the required changes in the legal system, all the initiatives and efforts of the Anti-Corruption Commission (ACC) and law enforcement agencies to nab the "Big Criminals", who are playing with the lives of the poor people, will falter. The "Big Criminals" would move around flaunting their impunity - and corruption, malpractices, fraud, manipulation and embezzlement of banks' money would continue in this hapless country which is otherwise full of prospects.

The writer is the Group Financial Controller of a private group of industries.

m.jalal.hussain@gmail.com

News: The Daily Financial Express/Bangladesh/11-Nov-12