Bangladesh Bank (BB) has appointed an observer in the board of Farmers Bank in a bid to improve the health of the newly established bank.

The central bank issued an order today saying that ANM Abul Kashem, general manager of BB’s foreign exchange investment department, has been made observer in the bank.

Earlier, BB in its inspection report detected gross violation of banking rules in sanctioning and disbursing loans. The bank also hid defaulted loans.

Bangladesh Bank is set to form a $200 million fund to provide low-cost loans to textile and leather industries for switching to environment-friendly production.

“We want to let the world know that we will manufacture green apparel and green leather products. We want to brand our country as green Bangladesh,” BB Governor Atiur Rahman said yesterday.

Rahman's comments came at the opening of a conference, 'Green Finance for Sustainable Development', organised by Bangladesh Solar and Renewable Energy Association (BSREA) at the capital's Sonargaon Hotel.

The move comes to help that the export-oriented industries take advantage of the current proclivity towards green products in the western world.

Textile and leather sectors will initially enjoy low-cost loans from the 'Green Transformation Fund', which will be made open to the other sectors later, he said.

Industrialists are likely to get loans for water conservation and management, waste management, resources efficiency and recycling, renewable energy and energy efficiency.

“We are doing it from our own fund. These are only small initial steps, with lots more to do in our intended countrywide transition to environmentally sustainable output practices and lifestyles.”

Rahman said the central bank also plans to float a green bond.

Earlier in 2009, the BB set up a Tk 200 crore revolving fund for the banks and other financial institutions to disburse low-interest loans for solar energy, biogas and effluent treatment plants.

The central bank has so far indentified nearly 50 green products that are eligible for the green refinance line available at the BB.

The move comes at a time when Bangladesh is making efforts to generate more energy through renewable sources.

Bangladesh has a capacity to generate 230 megawatts of solar electricity, with a big portion coming from solar home systems, of which there are over 40 lakhs of them at present, according to a publication by BSREA.

Power generation has increased in recent years along with per capita consumption and coverage, said Anwarul Haque Sikder, chairman of the Sustainable and Renewable Energy Development Authority.

The government has set a target of generating 3,100 megawatts of electricity through renewable sources by 2021.

More than half of the green energy will come from solar systems, followed by wind energy, he added.

Mahmood Malik, chief executive of the Infrastructure Development Company Ltd, said solar home systems are growing fast in Bangladesh.

Mizan R Khan, professor at the Environmental Science and Management Department of North South University, said Bangladesh's economy is growing well.

“But together with quantitative growth, we need more of qualitative growth and development, which will improve the quality of the lives of all citizens.”

BSREA President Dipal C Barua chaired the session.

Employees are seen at a branch of a bank. Ensuring good corporate governance in the banking system depends on the overall attitude of stakeholders. 

BANGLADESH Bank is committed to establishing good governance practices in banks and financial institutions besides fulfilling its core objectives like employment maximisation and price stability in the country.

Corporate governance is such a precondition that affects the financial soundness indicators of each institution. The quality of governance can affect the financial soundness indicators of banks such as asset quality and capital adequacy ratio. The ambiguity in either regulatory measures or the corporate management level can distort the smooth functioning of the financial intermediation process. Corporate governance failure can happen when one or more banks are devoid of transparency, accountability and oversight of their own managerial practices.

Moreover, when corporate governance structure is ambiguous and not very well developed, the ultimate accountability to the stakeholders can remain with the regulators. Sometimes, the amount of non-performing loan (NPL) can rise due to deterioration of industry-wide moral hazard and so, if regulators are unable to effectively curtail them, regulatory governance failure can be made responsible. The challenge of dealing with NPL includes a lack of proper legal procedures to recover bad loans and a tendency to reschedule or restructure those loans.

In recent times, the structure and style of corporate governance have changed overall. If we look at corporate governance structures across the globe, we may find that families constitute majority of the market capitalisation in most of the countries. With family ownership, rational succession plans are difficult to implement as family members may not be qualified to assume managerial responsibilities, or they may not be interested in carrying on family business.

In my understanding, it is the most significant problem of corporate governance in Bangladesh. Although our policies do not support this, it can happen sometimes indirectly due to opaqueness in the policies itself. This kind of structure may hinder the good governance practices since the exposures of connected persons can serve their personal benefits.

The second most problem of corporate governance is the lack of knowledge about monitoring new products, or insufficient attention to their risk characteristics. Moreover, the promotion policy in commercial banks (for example performance in line with deposit collection targets, etc) may not be coordinated with, or may even contradict with broader objectives of the bank. In regard to accountability and transparency, accounting standards and disclosures are very important. 

A market for corporate control can play an important monitoring role, as poorly managed companies can become merger/acquisition targets. In Bangladesh, there seems to be no market for corporate control, as merger/acquisition of either publicly-traded or privately-held companies is rare. Moreover, independent directors do not act as an advocate for minority shareholders or as a source of innovative ideas as they are thought to be. It is assumed that due to a lack of shareholders' activities, corporate governance cannot be firmly established. There is also a lack of independence of auditors which is linked with "lemon problem" -- a problem of information asymmetry. In addition, due to managers' appetite to take excessive risks to earn more profits/incentives, banks' health can be deteriorated further. This can be solved by introducing “employee stock option plan”, or by introducing multi-year remuneration programmes, where compensation over the years is tied to long-term outcomes, not the short-term ones only.

It has been observed that board members and senior management, who may be appointed by the government, may not have full discretion to carry out their responsibilities properly. It is my opinion that international guidance should pay more attention to the issue of domination of the board by a single individual or faction, and measures that banks or banking supervisors could put in place to address this problem.  Domination of the board by the chief executive officer is a common problem, but there is also “reverse domination” -- individual board members interfering in specific decisions of senior management or even lower levels of management. There is also the problem of irreconcilable conflict between the board chairman (or individual board members) and the CEO that is not addressed adequately so far. It not only could deteriorate corporate governance of the bank but also could signpost unhealthy example to other banks. 

Bangladesh Bank has been pursuing the best corporate governance framework for the banking system. The first principle suggested by the Basel Committee on Banking Supervision on corporate governance focuses on the board's overall responsibilities. However, the concept of “risk appetite” is still not very well developed in this regard, and board members may have difficulty being actively involved in its preparation, approval, and communication throughout the bank.  Also, in some banks that have a more traditional, hierarchical structure, it may be difficult to implement a policy of escalating problems or ethical lapses to the attention of the board, without fear of reprisal. The second principle is about the board's qualifications and compositions. Initial and ongoing training of board members in their duties and responsibilities is very important, but in some banks it may be difficult to sustain that kind of training because of time constraints and reluctance of certain board members to attend.

The principle no. 4, 5, 6 and 8 focus on senior management, governance of group structures, risk management function and risk communication respectively in which we do not find any visible challenge to implement. Considering the principle no. 7 which is named as risk identification, monitoring and controlling, we have observed that in some banks, there are challenges in accumulating a sufficient dataset to measure expected losses and unexpected losses in the credit portfolio, as well as in operational risk management and liquidity management. These practices are just getting started in many banks, and historical data are often not available with sufficient depth and quality. In regard to principle no. 9 that is referred to compliance, it is assumed that in some banks, there may not be an understanding of the difference in roles between compliance and internal audit. 

The “second line of defence” functions of risk management and compliance are well-understood, but the “third line of defence” role of internal audit in reviewing the adequacy of risk management and compliance may not seem sufficiently distinct.

In regard to the principle related to compensation (principle no. 11), the legal basis for multi-year remuneration payout schedules, claw back (the recovery of money already expensed) provisions for unsatisfactory outcomes, and vesting of deferred compensation have not been sufficiently developed in Bangladesh to better align compensation with risk-taking.

Regarding principle no. 12 on disclosure and transparency, some of the matters such as compensation principles and amounts are kept highly confidential to depositors and market participants. Finally, principle no. 13 on the role of supervisors, we do not find any challenge to implement, except in the case of state-owned commercial banks where Bangladesh Bank cannot alter the composition of the board and senior management, or in requiring corrective action.

In summary, Bangladesh Bank has been trying to establish good corporate governance standards in the banking system but the efficacy of these mechanisms will depend on the overall attitude of the stakeholders.

The writer is a deputy governor of Bangladesh Bank.

Bangladesh Bank yesterday appointed an observer to Farmers Bank after the banking regulator found that the health of the newly established bank is deteriorating fast.

ANM Abul Kashem, general manager of the foreign exchange investment department of the BB, has been made observer in the board of the bank, according to an office order of the central bank issued yesterday.

“We want to help the bank develop loan discipline and improve risk management and internal control,” Subhankar Saha, executive director and spokesman of the central bank, told The Daily Star.

“Our experience shows that appointment of an observer helps problematic banks improve their condition.”

Earlier, the BB detected gross violation of banking rules in sanctioning and disbursing loans, and incidents of hiding default loans amounting to around Tk 400 crore in Farmers Bank, which started its journey on June 3, 2013.

Three BB investigation teams detected the irregularities in the bank's Gulshan, Motijheel and Shyampur branches between September and November of 2015.

The bank disbursed fresh loans to defaulted clients by managing fake reports of the Credit Information Bureau of the central bank.

The bank also took loans from other banks breaching rules, according to the inspection report.

BB probe found that the bank's Executive Committee Chairman Mahabubul Haque Chisty, Managing Director Choudhury Moshtaq Ahmed, Additional Managing Director AKM Shameem and six other officials were responsible for the anomalies.

In October last year, the central bank issued letters to Muhiuddin Khan Alamgir, chairman of the bank and also an Awami League leader, and the managing director, asking them to take actions against the officials involved in the irregularities.

But the bank did not take any actions.

Earlier in November, the BB appointed observers to four state-owned banks -- Sonali, Janata, Rupali and Agrani -- after their key financial indicators such as capital adequacy and classified loans took a turn for the worse.

In addition to these banks, state-run BASIC, partially state-owned Bangladesh Commerce Bank and privately-owned ICB Islamic Bank, Islami Bank, Mercantile Bank and National Bank have BB-appointed observers in their respective boards.

Economic Reporter :A three-day long training on 'Islamic Ideology, Courtesy and Customer Service' was held at Al-Arafah Islami Bank Training and Research Institute on Sunday.Managing Director of the Bank Md. Habibur Rahman inaugurated the workshop as chief guest. Principal of the Institute Nurul Islam Khalifa presided over the ceremony while faculty member of the institute Towhid Siddique was also present.Al-Arafah Islami Bank always ensures compliance with all the guidance of Shariah as well as prioritizes customer service first, said Habibur Rahman.He suggested all the participants to implements the knowledge acquired from the training in their respective practical work field.