Fahmida Khatun concluding her three-part write-up on the 'State of governance in the banking sector: Dealing with the recent shocks
The recent financial scam is an eye-opening incidence for all associated with the banking sector as well as the policymakers exposing the inherent weaknesses of the banking sector of the country. In view of the recent irregularities, appropriate measures ought to be undertaken in the short to the medium term towards improved performance of the sector. This should range from proper investigation and punishment of involved persons to improvement of the monitoring and governance of the SCBs.
Specific recommendations are the followings:
Absence of risk management policy: The absence of a comprehensive risk management policy in many banks makes it difficult to handle fraud and other extra-ordinary cases. The Bangladesh Bank (BB) has identified six core risks and asked banks to formulate and implement appropriate guidelines on those. These core risks include the following: (i) Credit Risk Management; (ii) Foreign Exchange Risk Management; (iii) Asset-Liability Risk Management; (iv) Internal Control and Compliance Risk Management; (v) Money Laundering Prevention Risk Management; and (vi) Guidelines on Information and Communication Technology.
Such guidelines, however, are hardly followed by most of the banks, specially the SCBs. The manual for loans and advances containing policies, procedures, processing and reporting of transactions, review of security and collateral and responsibilities at different levels is not followed by many banks due to which it becomes difficult for them to handle and manage clients with various levels of exposures.
Lack of internal control: The Internal Control department which ought to be the most critically important department of any bank is weak in the state-owned commercial banks (SCBs). This is mainly due to incentive failure which prevents hiring of qualified persons for this department. As the nature of the job involves patient scrutiny of compliance, people are reluctant to work here, and those who do, are often in a way dumped in this department. Absence
Lakes of information technology (IT) makes their work even more boring. Bangladesh Bank guidelines on internal control require that if there is any incidence of a loss equivalent to Tk. 10 million (1.0 crore) the Board of Directors of Banks should be informed immediately. Besides, any major irregularities, fraud and embezzlement have to be presented through a report during the monthly assessment of banks. In the case of Hall Mark scam, it seems that the bank management was hiding the illegal activities in the said branch for a prolonged period.
Political baggage of the Board of Directors: The tradition and practice of appointing Directors of the Board of the SCBs based on the political loyalty and affiliation have to be changed. The members of the Board of the SCBs should be independent, qualified, efficient and socially acceptable persons with unquestionable integrity. Bangladesh Bank Guidelines 2010 for the Directors of banks spelt out the 'Fit and Proper Test Criteria' for the nomination of Directors along with their responsibilities and power. These criteria are yet to be implemented fully.
Due to political baggage, the Directors of SCBs cannot perform their duties independently and remain morally obliged to listen to political instructions of the government. This results in weak corporate governance. As the Broad members are also the members of various committees of a bank constituted to closely guide various operations of the bank, the independence of the audit committee, the most important board committee which has to ensure compliance of business strategy and policy of the Board, cannot be maintained as well. Given the emerging challenges and dynamism of modern banking business, it is thus important that Directors of the Board have the pertinent knowledge and skill of running bank with efficiency and sincerity.
The accountability of the Directors should also be determined clearly. In case of the Hall Mark scam, it has been reported that the Board was not informed of the unscrupulous inland bill trading. However, the fact that the responsible branch was not audited and the accused branch manager was not transferred even after completion of his three years tenure are some of the issues which the Board cannot shrug off its oversight responsibility.
Inappropriate appointment of CEOs and senior officials: The scam has also exposed total failure of the Chief Executive Officer (CEO) and responsible senior managers of the bank in discharging their duties. In the SCBs, the pre-occupation of most CEOs is to keep the Board in good humour and sing the songs the way the Board likes to hear so that their position is well secured under any circumstances. It is difficult to find any instance where the CEO has been asked to leave the job because of bad performance. One may argue that in a setting where the Board is constituted of political candidates, the CEO is handicapped in taking any decision guided purely by banking ethics, norms and perceived risks. This, however, is not a saleable point.
Good business plan, effective people management programme, regulatory compliance practice, effort towards clients' satisfaction and high work ethics of any CEO of a bank are bound to be endorsed by a Board, no matter how political it may be. The performance of CEOs should be evaluated from time to time by the Board based on Key Performance Indicators (KPI). The Board can only guide and support the CEO to achieve the targets that are of benefit to the bank.
In appointing GMs, suggestions have been made to have a common and single selection and promotion committee under the BB and the Ministry of Finance for selecting GMs or promoting DGMs to GMs and for posting them in different banks following their selection. GMs should also be transferred from one SCB to another in order to not only help transfer of good practices, but also to reduce the possibility of fraudulent and unethical practices.
Shortcomings of human resource policy: Human resource (HR) development has been a neglected issue in the SCBs. As mentioned earlier, the World Bank supported reform of 2007 recommended a number of measures for the improvement of skills and performance of the officials in the SCBs. However, the HR department of the SCBs remains weak and powerless to take decisions on recruitment and promotion, partly due to lack of capacity and partly due to external influence.
In the modern day business, banks have to provide value added products and services to customers in addition to traditional banking functions. However, the SCBs suffer from lack of skilled and qualified human resources for undertaking such operations. The HR policy of banks should not only arrange for appropriate training, but should also include the reward and punishment practices of the bank.
Inertia for automation and management information system: An issue related to the HR development is the automation and management information system (MIS) in banks. It is apprehended by experts with fair amount of certainty that there may be many more Hall Mark cases that wait to be uncovered in other banks. Unless these are dug out through transparent and automated banking practices with the help of IT, the mess may be piled up and reach an unmanageable stage. Even after several reform initiatives, the inertia of the SCBs in adopting IT-based banking services and the MIS is not only disappointing but also quite surprising. Due to lack of MIS, the Hall Mark case was not detected in time even though clearing was going against SBL continuously for many months due to loan increase in a branch of the bank.
There have been comprehensive programmes for the last several years to establish automated clearing house and credit information bureau (CIB), computerisation of the head offices and branches of all banks, electronic banking services, online corporate banking service, electronic fund transfer, automated teller machine (ATM) and internet banking. While all the foreign banks (FCBs) and most private commercial banks (PCBs) have implemented these automated and electronic banking services, the SCBs are way behind in meeting these requirements. This is not only affecting their efficiency and profitability, but also giving rise to opportunities for committing scams such as the Hall Mark.
The archaic manual system of transaction records has indeed facilitated the Hall Mark forgery. It is mentionable here that as part of the reform programme, the World Bank had supported a consultant in the rank of the General Manager (GM) for IT in the SCBs for two years with a higher compensation package. GMs for IT were supposed to work on procuring computers, developing and buying software, and training officials of the SCBs. These initiatives are yet to see any meaningful result as the automation process is almost non-existent in the SCBs.
Dualism in the regulatory mechanism and regulator's oversight: It is no secret that there exists a strained relationship between the BB and the Ministry of Finance (MoF) over the supervisory and regulatory role on the SCBs. Though the BB can exercise its full authority in supervising the private commercial banks (PCBs) and foreign banks (FCBs), the MoF oversees the SCBs to some extent. The MoF appoints the Directors of the Board, CEOs, DMDs and GMs of the SCBs. However, due to less articulated mandate, the BB faces problems in implementing recommendations of audits and ensuring overall governance of the SCBs.
Full autonomy of the central bank has been suggested by many concerned stakeholders including the donors. The International Monetary Fund (IMF) has asked for amendment of the Banking Company Act (BCA) giving full legal supervisory and regulatory authority of the BB over all commercial banks by September 2012 as a pre-condition for contracting a loan to Bangladesh for USD 987.06 million under the Extended Credit Facility (ECF) in April 2012. There has also been suggestion by many to dismantle the Banking and Financial Institutions Division at the MoF in order to keep the SCBs away from political influence. While this is necessary for smooth functioning of the banking sector the supervisory and monitoring role of the BB needs to be significantly strengthened as well.
Though the MoF is in the driving seat to monitor and control the SCBs, the BB has to perform audit and inspection in all commercial banks including the SCBs. As in the other previous financial chaos in the country such as the capital market debacle, the BB played a reactive role long after the irregularities have actually been in place. Firm supervision and effective monitoring could have controlled the damage suffered by the Sonali Bank Limited (SBL). The fact that clearing of SBL was going against the bank, the amount of loan was increasing, and finally the bank became a borrower from a lender in the inter-bank market, indicates the weak off-site supervision mechanism of the BB.
Need for a commission for the financial sector: Though the country's banking sector has achieved considerable success due to the reforms in the 1990s and 2000s, it still needs to be prepared well for the next generation global regulatory framework and to meet emerging clients' needs. In the coming days the banking industry will have to achieve the ability to absorb shocks arising from financial and economic stress, improve risk management and governance, and strengthen banks' transparency and disclosures through complying with Basel III requirements which is scheduled to be introduced from 2013 until 2018.
In view of the recent shocks in the banking sector and emerging challenges, a Commission for the financial sector should be formed which will scrutinise the overall performance of the sector, assess the need of customers and the economy, identify the current problems and emerging challenges, and suggest concrete recommendations for prudential banking to be implemented in the short to medium terms.
Considering the emerging need and in order to build up more transparent and responsible banking sector, the Commission can also include non-bank financial institutions such as insurance companies and capital market under its jurisdiction as they are interconnected. The broad terms of reference (ToR) of the Commission will be to critically assess the problems and weaknesses of the banking industry in order to find whether there is any disconnect between demand of the growing economy and the realities of a backdated financial system that is failing to meet the emerging need. On the basis of a comprehensive scrutiny, the Commission will prepare guidelines and make recommendations as regards automation, risk management, internal control, the role of various players in banks and other financial institutions.
Concluding remarks: The Hall Mark incidence is not only a case of financial loss, but also a deep dent on the confidence and trust of the customers of the bank. It is also not about the loss of good will of the particular bank only, but of the total banking industry. Such an erosion of reputation of banks could have multiple chain effect including reduction of deposit in the concerned bank and fall of share prices of the whole banking sector. This can also constrain the role of the banking sector in catalysing the growth of the economy. Without radical changes in the banking practices of the country such expectations may remain largely unfulfilled. During the run-up to attaining the ambition of being a middle-income country there is a need to significantly strengthen the banking industry if goals are to be realised.
From the 1990s onwards, the Bangladesh economy has evolved, and the banking sector has evolved as well. With the speed-up of economic growth through higher investment the demand on the banking sector will still be higher. This reiterates the need for improved efficiency of the sector in terms of resource allocation for the productive sectors and management. As the global regulatory environment is becoming tighter, global economic environment is facing more volatility and resources are getting more scarce, banks in Bangladesh will have to find innovative ways to conduct their business. There will be demand for higher capital and more skilled human resources for smooth functioning of banks and for ensuring compliance in the coming days.
Therefore, the banking sector in Bangladesh has to focus on using both its financial as well as human resources in a far more innovative and efficient way to cater to the demands of the future.
The writer is an Economist and the Head of Research at the Centre for Policy Dialogue (CPD). This write-up in three parts is a shorter version of the paper presented at a dialogue organized by CPD on November 05, 2012. email@example.com
News: The Daily Financial Express/Bangladesh/10-Nov-12
The Malaysian government is working on proposed free trade agreement with Bangladesh to boost bi-lateral trade between the two countries, said Malaysian High Commissioner (HC) in Bangladesh.
“We’ve completed the free trade agreements with India and Pakistan. We want to do the same with Bangladesh. We are now working on details of the agreement,” Norlin Othman, the High Commissioner said in an exclusive interview with BSS.
Bangladesh exported products worth $43.87 million to Malaysia while imported goods valued at $1,759.60 million in 2010-11 fiscal year from them.
Bangladesh exports to Malaysia include foodstuff, jute goods and apparels and imports primarily involve machinery and electronics goods.
Othman said Malaysia has initiated the proposal to sign a free trade agreement, which would come into effect after both sides agree on it. “It took two years to finalise an agreement with India, but I am optimistic it would not take too much time for a similar deal with Bangladesh.” “The proposed agreement is now at the discussion level. It will be signed once both sides reach a consensus on it.
So, let the two sides work complementary to each other. We must follow the rules of World Trade Organization (WTO) to finalise the deal,” said the diplomat.
Asked about the bilateral trade that is heavily tilted in favour of Malaysia, she said, “Of course there is a trade gap, but Bangladesh has huge potential to increase its export to Malaysia.”
She said Malaysia with 28 million people does not require lot of food or garment products, but it needs some high-end products which Bangladesh can supply and thus expand its market share.
The HC, however, said although Bangladesh’s export to Malaysia is lower in volume, the services Bangladesh providing to Malaysia is higher.
“What Malaysia is encouraging is that either you increase your volume of exports or produce products that Malaysia needs. I think it will help reduce Dhaka-Kuala Lumpur trade gap,” said the Malaysian HC.
Othman said a good number of Bangladeshi entrepreneurs are doing business with Malaysian enterprises in service sector including restaurants, small shops and furniture factories.
On the other hand, she said, many Malaysian entrepreneurs are working in high-tech industries including issuing machine readable passport (MRP) and setting up small independent power plants in Bangladesh.
“Therefore, we are contributing to the economies of the two countries. But, the fact is that this is not receiving publicity as it should be,” she pointed out.
News: The Daily Independent/Bangladesh/21th-Oct-12
Mumbai: The rupee Friday fell by a whopping 43 paise to close at one-month low of 53.84 on the back of heavy dollar demand from oil importers and defence companies, extending losses for the second straight day.
A firm dollar overseas against the Euro increased pressure on the rupee sentiment, while FII inflows worth Rs 80 crore could not help rupee recover from lows, forex dealers said.
The rupee commenced remarkably lower at 53.70 a dollar from last close of 53.41 at the Interbank Foreign Exchange (Forex) market and immediately touched a high of 53.58.
However, persistent dollar demand from importers, mainly from oil refiners, and defence companies amid weakness in local stocks put pressure on the rupee.
“There was significant dollar demand as the US currency gained strength in the global market,” said Ashutosh Raina, chief dealer at HDFC Bank.
It fell back to a low of 53.99, before concluding slightly better at 53.84 -- a fall of 43 paise or 0.80 per cent. Friday, it had tumbled by 54 paise or 1.02 per cent.
The rupee had last ended at 54.38 on September 20.
“There was dollar demand from defence-related companies Saturday but the quantum is not immediately known. It was one of factors why rupee slumped so much Saturday,” said a treasury head of a state-run bank.
The rupee after closing at a recent high of 51.74 on October 4, appears to have lost steam and is seen fast approaching the 54-mark as FII inflows have slowed.
The dollar index, a gauge of six major global currencies, was up by 0.11 per cent, as the first day of a summit meeting of European Union leaders produced no surprise, said global analysts.
For the week ended October 19, the rupee was down nearly 2 per cent—its biggest weekly loss in about 4 months
News: The Daily Sun/Bangladesh/21th-Oct-12
Tax receipts counted in four days of the weeklong income tax fair have exceeded the National Board of Revenue's total collection from last year's fair.
NBR collected Tk 428 crore in tax, compared to last year's total collection of Tk 414 crore, the tax authority said in a statement yesterday.
The NBR fair last year took place in seven divisional cities.
The increase in revenue can be attributed to the huge turnout of taxpayers and the launch of the fair in 11 districts along with the seven division cities.
“Taxpayers' crowd continued for the fourth day. They came to use various services, including getting new TIN (taxpayer identification number) and submitting tax returns," the NBR said.
Some 40,562 taxpayers submitted returns at the fair and 7,262 received TINs. The program remains open from 10am to 5pm.
Last year, 62,272 people submitted returns and 10,041 new TINs were issued.
The fair began on September 16, adding Mymensingh, Gazipur, Faridpur, Comilla, Noakhali, Jessore, Kushtia, Patuakhali, Bogra, Pabna and Dinajpur to its coverage along with the seven divisional cities.
The Officers' Club venue in Dhaka helped the tax collector secure Tk 402 crore out of Tk 428 crore with 22,447 returns being submitted.
The fair, the third of its kind, will end on September 22 in divisional cities and on September 20 in the districts.
The NBR has opened 36 booths to receive tax returns, 16 booths for TIN issuance and 20 "help desks" to inform taxpayers about their tax payment circles and other details at Officers' Club.
Sonali and Janata banks also have eight booths to facilitate direct tax deposits. The tax authority has also opened a designated corner for e-payment to let people know about procedures of paying tax online.
News: The Daily Star/Bangladesh/20-Sep-12
The country's foreign currency reserves yesterday crossed $11 billion thanks to slowing imports and steady remittance growth, officials said.
The foreign currency reserves went down below $11 billion last week when the country paid $70 million to Asian Clearing Union as debt servicing.
A central bank official said the reserves stood at $11.1 billion now and the banking regulator hopes to cross $12 billion in the next two to three months.
The steady flow of remittance and declining imports contributed to the rise in reserves.
Non-resident Bang-ladeshis send $1.167 billion in remittance in August, up by 6 percent over the same month last year.
This is the ninth consecutive month that Bangladesh has received over one billion dollar in remittance.
The remittance in the first two months of 2012-13 rose by 11.9 percent over the same period a year ago.
News: The Daily Star/Bangladesh/13-Sep-12