RESEARCH findings reveal that people connected with the financial sector almost all over the world made fortunes disproportionately more than any other social class in the past decades. But the big change since the 1970s has, of course, been in the representation of finance professionals: their share in the top 1 per cent of incomes has risen from 8 per cent to 14 per cent; and among the top 0.1 per cent from 11 per cent to 18 per cent.
Media reports also, however, point out how scams and corruption in the financial sector have, not seldom, left devastating effects not only on the sector but also the world economy at large.
The issue of LIBOR rigging, described by the Economist magazine as the rotten heart of the global financial system, the US sub-prime scandal, certain European banks’ violation of US sanction on dollar transaction etc are but a few instances. Hefty amounts of fines that many large financial organisations pay also indicate the depth of the crimes involved. Recently, US justice department charged the biggest French bank, BNP Paribas, with some offences relating international transaction in the US dollar. The bank may have to pay a fine up to $10 billion.
One could, thus, estimate some statistical correlation between amassing fortune by members of the financial sector and the state of corruption therein.
In Bangladesh’s banking too, criminal conduct among both bank officials and borrowers are what are frequently talked about. Even people at the grass roots too can be found delivering long lectures on the Hallmark, Bismillah, or BASIC Bank issues, etc. Although quite some time elapsed since the scandals and more of their likes took place, the banking system has not been able to shake off its depressed state. Rather, its health as indicated by the volume of non-performing loans, has deteriorated. Default loans, excluding the amount written off, increased from Tk 74,303 crore as of 2017 to Tk 93,278 crore on as of 2018.
Incidentally, between 2013 and 2017, Sonali Bank floated tenders 60 times to sell mortgaged assets of the Hallmark Group but failed to find buyers. Default loans of thousands of crores of takas are stuck in legal cases. Failing to deal with defaulters, Sonali reportedly proposed in the past year that the finance ministry should take initiatives to create a firm that would buy those mortgaged assets. According to the proposal, state-owned commercial banks Sonali, Janata, Agrani, and Rupali would be contributing Tk 100 crores each to the firm while the Investment Corporation of Bangladesh will play the leader’s role in the whole process.
Now, the question is why in the first place buyers do not come forward to buy these assets. The answer is: they are disputed assets. Whoever buys them is most likely to suffer capital losses.
So, the proposal sounds like making attempts to make other presumably innocent commercial banks bear the burden of a liability which is born out of Sonali’s own inefficiency/corruption.
Corruption anywhere in society is something that is too difficult to detect. Unlike crimes, which a single party can commit for benefits to be reaped, again, by that very party, corruption almost always involves more than one parties. Corrupt bankers inherited the legacy of the practice from pre-independence and early post-independence periods.
According to a World Bank account, towards the end of the Pakistan era, budding industrialists and large agriculturists were provided with liberal refinance facilities. However, large industrial loans had ‘price tags’ involved. Controllers of funds belonging to the government or the military were bribed in order to collect deposits.
After independence, dishonest bank officials took a ‘10 to 20 per cent cut of the loan amount as a matter of routine.’ Development finance institutions used soft donor loans to finance projects without reference to sound banking principles or the borrowers’ bankability. Their belief seemingly was that all credit risks would be covered by Bangladesh Bank credit guarantee. ‘… A large proportion of such loans represented political patronage of party supporters, former and serving civil/military bureaucrats and their relatives.’
Naturally early in the 1980s, development finance institutions became over-burdened with large non-performing loans. The flow of donor funds dried up soon afterwards. Large defaulters wilfully defaulted. They extracted concessions in the form of interest waivers, segregation of loans into blocked accounts and repeated rescheduling. Some defaulters are alleged to have used the defaulted funds to start private banks and insurance companies. The World Bank concludes: herein lies the origins of the default culture.
Bank officials have been fortunate to escape, in general, blame for their role in many corrupt lending decisions. There appears to be a lack of awareness in the government and the banking community that bank officials deserve being penalised by law for wilful or negligent conduct in disbursing loans.
The irony is that as long as there does not erupt some BASIC Bank or Bismillah Group issues, there is no problem. Utmost secrecy has been exercised about the affairs of banking. Thus, ordinary people remain fully detached from any likely brewing scam or scandals. But the moment any full-blown scam, such as the ones concerning BASIC Bank or Bismillah Group, rears its ugly head, everybody, including the government, appears but helpless as to what to do.
According to a 2005 World Bank study, bribes collected by bank officials in case of project loans were sometimes linked with local-level project officers. In case of commercial loans, the bankers not only collected bribes amounting to ‘1.0 per cent to 5.0 per cent’ of the loan amount but also received occasional gifts, hospitality or entertainment from clients. Working capital loans involved a payment of 1.0 per cent to 5.0 per cent of the credit to bank managers, employees and trade union leaders.
A similarly dated Transparency International, Bangladesh study points out that 73.5 per cent of the respondent households agreed that it was almost impossible to get credit from banks without bribe or influence.
The studies are concerned with state-owned banks where alongside bank managers, bank employees and trade union leaders are actively engaged in extracting from bank clients undue benefits. The time period as referred to by the studies was one belonging to high interest rate regimes. The total cost of credit in those days had already stood at 20 to 23 per cent. Adding an extra 5 per cent to the rate would turn the payable rate of interest nearly 30 per cent. No genuine commercial activity in a country like Bangladesh can be as profitable as can service bank credits at such rates. Non-performing loans are, thus, a natural consequence. Bangladesh’s obtaining very high volumes of default loans is the outcomes mostly of corruption and bribery as is also concluded by the World Bank.
Now, one would wonder as to how much things have improved or deteriorated since. According to the latest estimate, classified loans have crossed one trillion mark by March 2019. The volume was more than Tk 939 billion a quarter ago. Some pundits are of the opinion that a major share of the amount are but suspended interest and can so be ignored when the real strength of the banking sector is considered.
Withholding for now views on the debate, it is time to make making a few remarks on the sectoral as well as economic implications of the management drawbacks. First, the expansion of banking networks is damaged by the continued bribery syndrome. Borrowers prefer non-governmental organisations or moneylender loans considering the comparable costs of borrowing. According to a Bangladesh Bureau of Statistics study, 63 per cent of rural credits until now come from the non-governmental organisations while the banking sector contributes only 26 per cent. Money lenders provide for nearly 4 per cent of rural credits. Thus, the banking sector in Bangladesh, which is modern, has miserably failed to cater to the need of rural credit seekers. Second, if the opposite scenario comes at play — about three quarters of the rural credits are supplied by the banks in a bribery-free environment — the likely consequences are easy to imagine: the cost of production would fall to contribute to lowering price level. To meet new loan demands, more and more branches of banks would come into being, which would raise the level of organised-sector employments. Thousands of now unemployed youths would find jobs.
Nitai C Nag is a professor of economics in the University of Chattogram.
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