Challenges the banking industry faces

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The smooth movement of the wheels of an economy depends on some vital sectors that directly contribute to sustainable economic growth and development. The banking sector is considered as one of the most significant players in strengthening the soundness of an economy.


The banking sector in Bangladesh has been performing well in terms of employment generation, profitability and operations during the past few decades. The value of bank shares in the stock market is reasonably high. But this sector's performance has noticeably declined in the recent years. Its investment in private sector industries has down-turned due to anti-investment environment prevailing in the country. The banking industry has been facing the challenges arising from political instability and uncertainties, in addition to inept management, frauds, corruption, inadequate capital base, unprofessional personnel in the management, political interference in decision making and so on.

Banks of both developed and developing countries provide multilayered services to the economy. The manifest services are deposit banking, loans and advances, export, import, foreign exchange transactions, foreign remittances and local financial services to the people. The process of financial intermediation involves the mobilisation and allocation of financial resources through the financial market - by banks and by the use of financial instruments. In effect, the underdeveloped nature of the financial system in most developing countries accounts largely for the relative incompetence of financial intermediation in those economies.

In most developing countries like Bangladesh, the financial system is dominated by banks, which are typically oligopolistic in structure and tends to concentrate on short-term lending. Banks represent the nerve centre of the payment system, the vessel endowed with the ability of money creation and allocation of financial resources and conduit through which monetary and credit policies are implemented. The success of monetary policy, to a large extent, depends on the health and stability of the banking institutions through which policies are implemented.

Every industry, irrespective of its nature, type and genre, needs a strong foundation and fiscal and monetary support.   The main business of the banking industry is investment of money received from the deposit holders to various sectors of the economy. The more strong and stable are the investment fields, the more sturdy and unwavering will be the position of the banks. The government and the stakeholders of various companies and organisations are the key role players in building a monolithic and inviolable investment field. The fiscal and monetary policy of the country swerves the investment of banks either in productive sectors or in non-productive sectors. The success or failure of the policy-makers depends on the prudence of investment in productive sectors rather than in un-productive sectors.

Private sector contributes more in production, consumption, employment and job creation than the public sector in most developing countries like Bangladesh. "We are facing a shortage of borrowers and the deposit growth has exceeded the loan growth", said the Managing Director of a local bank recently. He further said, "We saw huge enthusiasm among entrepreneurs 15 years ago. May be the market has become saturated or the entrepreneurs don't want to take risk".

Other challenges faced by the banking industry in Bangladesh are lack of effective and efficient corporate governance. Best practice of corporate governance can speed up the operations, cut corruption, increase profitability and the performance of banks. The performance of private banks and public banks (state-owned banks) in the country justifies the views of this scribe. Imbibing best practice of corporate governance in the banking industry is the crying need of the time. Highly inconsistent interest rates of deposits and lending of banks in the country stand as a stumbling block to bank's investment. The lending interest rates are highly anti-investment and abnormally high in comparison to many economies. In some banks and financial institutions, deposit interest rates have come down to 5.0 to 6.0 per cent, whereas the lending interest rates are in double digit. Because of high interest rates on lending from the local banks, some off-shore banks have started lending in the country at lower rates than the local banks. They are not investing in stocks or shares. If the process continues, the local banks will face more problems in investment.

Experts opine that wrong policies of the policy-makers of banks and the controlling authorities have made the banking industry week and vulnerable in terms of profitability, operations and growth. The current face value of the shares of banking industry in Bangladesh presents a gloomy picture. Out of thirty listed banks in the Dhaka stock exchange, eight banks' share value has come down below the face value of BDT 10. This abnormal situation is not good for the economy nor for investment. Other notable factors that increase the distress of the banking sector are bad loans and advances, fraudulent practices, under capitalisation, rapid changes in the policies and undue interference from the board of directors.

This is a globalised world. Most of the industries like the banking industry have to face stiff competition in the local and international markets. The position of the Bangladesh banking industry has not yet reached the level to compete with foreign banks. As a result, they lose many businesses at local and international markets. Some economists are of the opinion that the number of banks--private and public--are high in terms of the size and pattern of the economy. In this scenario, opening new banks has increased the artificial competitiveness, and to get new customers some banks resort to relaxing the loan-giving terms and conditions.

Diversification of the productive base of the economy remains a fundamental challenge of economic management, and banks will increasingly be challenged to become more innovative in their intermediation function, especially in financing the productive sectors of the country. The banking industry in Bangladesh needs to diversify its products instead of sticking to traditional banking. Today's banks don't look a whole lot like yesterday's banks. Introduction of modern technology has led to some exciting and interesting innovations. For bank brands, the goal is now how to capitalise on these trends and ensure that consumers keep coming back for more.

Improved IT sector can play a major role in the banking industry of the country by enabling banks to connect more customers and speed up banking operations. Now-a-days, people can do banking transactions sitting at offices or at home without visiting banks physically. Although this system of banking has started in Bangladesh, it is still very inadequate compared to the needs. The commercial banks must introduce electronic banking systems commonly known as "E-banking" on a massive scale that will definitely save valuable time, money and energy of millions of people.

The Monetary Policy Statement (MPS) of Bangladesh Bank, July-December 2015, highlights its supervisory vigilance on banking governance to curb loan delinquency. The non-performing loans have been reduced in 2015 in comparison to previous years. But the legal process of recovery of bad loans needs to be overhauled so that no loan defaulters can escape the legal network.

The writer is the CFO of a private group of industries.

m.jalal.hussain@gmail.com

Source: http://www.thefinancialexpress-bd.com/2015/12/22/7012