The interim government has decided to form a banking commission in a bid to carry out sustainable reform in the financial sector.
Moreover, a blueprint will be prepared regarding the country's overall economic situation, and reforms in this sector, which will be published within 100 days of the formation of the interim government.
The decisions came following a meeting between Bangladesh Bank Governor Ahsan H Mansur and Chief Adviser Dr Muhammad Yunus, held at the Jamuna state guest house to discuss the country’s overall economic situation.
There has been a consensus on these matters in the meeting, according to sources in the Chief Adviser’s Press Wing. Besides, the chief advisor and the central bank governor also reached a consensus on boosting liquidity in the foreign exchange market, and reducing inflation.
Speaking to The Business Post, Centre for Policy Dialogue (CPD) Executive Director Dr Fahmida Khatun said, “We have been demanding such a commission for many years. It will take appropriate decisions, and help the banking sector get rid of persistent issues.
“The commission must be time-bound, specific goal oriented, and task based. The commission should consist of banking industry veterans. The CPD too will extend any support to the commission if required.”
Bangladesh Institute of Bank Management (BIBM) former director general Dr Toufic Ahmad Choudhury said, “It is a very good decision. The commission will have many functions, such as figuring out how many banks are being held hostage?
“The sole solution of this hostage situation is just freeing them, but bringing back the confidence of depositors and stakeholders.”
Banking sector on brink
During the Hasina regime, the biggest wound to the country’s economy has been the banking sector.
The last government gave approval to several banks under political consideration, but the economy did not need this many banks. Sixty-two scheduled banks are currently operating in Bangladesh.
A lack of governance, reducing the power of the central bank, and political influence in the regulatory body triggered widespread irregularities and corruption in many banks.
As a result, a large amount of defaulted loans started accumulating in the banking sector. The amount of such loans in banks till March this year stood at Tk 1.82 lakh crore.
Apart from this, there are a lot of bad loans stuck in the process due to write-offs, rescheduling, restructuring and court cases. Considering this, economists estimate that the actual amount of defaulted loans could exceed Tk 4 lakh crore.
As the banks fell under the influence of different industrial groups, defaulted loans began ballooning through named and unnamed disbursements, turning the conglomerates into oligarchies.
There was also a competition between these groups to control the banks. For example, S Alam Group single-handedly controls eight banks in the country, including Islami Bank – the largest private bank in Bangladesh.
S Alam maintained very close ties with the Hasina regime, and there are allegations of money laundering against this group using banking channels.
Under such circumstances, many bankers, economists and think tanks have been pushing for a banking commission to help restore order in the sector. Stakeholders expect this commission to diagnose the entire sector and recommend policy measures to resolve long-standing issues.
Dr Fahmida Khatun said, “The banking commission must track down the root causes behind banking sector issues, and figure out ways to resolve them. The commission must find out the people behind the banking sector scams, and their motivations.
“Then the commission should take action against the culprits, and provide recommendations to nurse this sector back to health.”
Reducing inflation key focus
During Sunday’s meeting, Chief Adviser Dr Muhammad Yunus and Bangladesh Bank Governor Ahsan H Mansoor reached a consensus to cut down inflation through proper management of demand and supply.
To achieve this goal, the monetary policy would be kept contractionary, and steps would be taken to improve supply. Though appropriate action has been taken in this regard, it would take time to reap the benefits of inflation-curbing measures.
Due to Hasina regime's irregularities in the financial sector, Bangladesh has been witnessing high inflation since the last one and a half years. Inflation was around 10 per cent throughout the last financial year – highest among South Asian countries after Pakistan.
As a result, in July – the beginning of the FY25 – Bangladesh witnessed the highest inflation in the last few years. Inflation jumped to 11.66 per cent, while food inflation stood at 14.16 per cent, according to the Bangladesh Bureau of Statistics (BBS) data.
Due to inflation, living costs of people skyrocketed, but wages did not grow at the same rate. Wage growth has actually been below inflation for the past few years. As a result, low income segments of the people are losing their savings.
Wage growth was only 7.93 per cent against 11.6 per cent inflation in July, show BBS data.
Initiative to boost USD supply
Bangladesh has been facing a USD shortage since the last financial year, triggered by large amounts of money laundering made possible by rampant irregularities and corruption, and an increase in import payments following Covid-19 crisis.
Bangladesh’s foreign exchange reserves fell into a crisis due to such malpractices. Reserves fell from $48 billion to below $20 billion. The new government wants to improve this situation, and work on resolving the USD shortage in the forex market.
The central bank governor and the chief adviser at Sunday's meeting decided that the existing band for inter-bank foreign exchange transactions will be increased from 1 per cent to 2.5 per cent to increase foreign exchange liquidity.
It is expected that liquidity will return to the inter-bank foreign exchange market very soon, and the volume of exchange will also increase rapidly as well, insiders say.
