Bangla Thursday, August 13, 2020

Bangladesh’s financial sector is into self-destruction

The death by suicide of a 52 year old insurance executive by jumping from his 13th floor office due to a share market crash news story, is symbolic of the current economic situation in Bangladesh.

The Dhaka Stock Exchange has been at its lowest in the last ten years. Small investors have taken to street protests as many had been wiped out. But things have been sliding for a long while.

The news of the stock market crash come in the wake of the sensational news that a financier, P.K. Halder, who had literally stolen billions of takas, had run away to Canada. His scam was systemic and well planned and affected many institutions including major Non-Banking Financial Institutions (NBFI).

Halder appears to have conducted his fraud without any challenge from any of the state regulatory agencies. This has led many to speculate that it was an inside job.

Corruption has now become so rampant that even small time offenders at the bottom of the bureaucracy have become millionaires. Organized crime is no longer considered a crime because it is open and accepted by all. Most of these people do so with the full knowledge of the law enforcers.

The drug economy is huge and involves people from various layers of the powerful and the powerless. Some even think it is bigger than most other formal sectors.

It seems that the Bangladesh Bank which is the guardian of the financial sector, is not really equipped to deal with the complex situation that exists now. By extension, that has made the politically successful government look not so good when managing the economy.

Market a part of the problem

Several factors are being stated as being responsible for the crisis by bankers themselves. The first is the high interest rates that the business lobby claims is the main cause of high level of defaulting or Non-Performing Loans. Currently, it is double digit and the government has been pressing to reduce it to 9 %. Banks have resisted this but now reduction seems unavoidable.

The Prime Minister had said that she hoped that the banks would listen to her. It is obvious that the banking sector as a whole is strong enough to negotiate with the very powerful PM.

The main regulatory body, the Bangladesh Bank (BB), is generally seen as weak and incompetent, unable to cope with the big private sector players who are also politically connected. The result has been a general erosion of confidence in the BB to manage the financial sector causing a loss of confidence that is also affecting the share market.

A few major banks have collapsed, almost all due to theft. In one case, the name of the bank has been changed, from Farmer’s Bank to Padma Bank, and restarted. A few others are under the threat of going under. However, the loan situation is so bad that the entire sector has been hit by a major liquidity crisis.

Banks have declared major concessions to loan defaulters which is only a basic survival strategy. But the chances of the sector returning to good health are not too bright at the moment.

What about depositors?

The interest decline will of course mean that Fixed Deposit interest rates will decline and that will affect many small and medium income depositors already running out of options to invest safely. If it moves down from the current 8% to 6%, they will be badly affected. As it is, they have shifted a lot from government bonds due to interest rates drop and taxes. If banks do poorly, they will have even less places to go to.

That trend is being reflected, among other indicators, in the dramatic rise of gold prices as attention is shifting to the traditional “awat” from modern institutional savings. The NBFIs can probably never get back to health. So, unless forced, savings instruments will see a major decline.

High growth With High Anxiety

Problems are mounting in many sectors even as Bangladesh continues to post high growth rate numbers. In the face of economic uncertainty, such claims are beginning to lose their shine. Though the government is claiming that it is the best ever and the most popular ever citing growth data, the media is reporting counter instances of lapses in the financial sector everyday.

The problem is also in the weakness of revenue collection by the government which has forced it to borrow from the market, now being cited as a major issue in the slump. The long drawn-out conflict with Grameen phone has scared international investors. The only sector still performing, is remittance and the government can’t really claim any credit for that.

Put together, it looks like a holy mess. The roots lie in the weakness of financial governance. But whether that is beyond the capacity of the managers to handle is still not clear.