Concerns Over Integration of Struggling Islamic Banks in Bangladesh
Fahmida Khatun, the executive director of the Policy Dialogue Center and a board member of Bangladesh Bank, has highlighted the government’s intention to merge five struggling Islamic banks: Global Islamic Banks, Union Bank, Social Islamic Banks, and EXIM Banks.
In a conversation with Business Standards, Khatun expressed concern that although this move aims to avert a systemic collapse, it could inadvertently reward corrupt practices if it doesn’t include strict accountability and significant reforms at the central bank.
Why use taxpayer money to rescue struggling banks?
The primary goal of this initiative is to prevent a systemic breakdown of weak banks. The abrupt closure of these institutions could trigger panic among depositors, businesses, and employees. There’s definitely a moral hazard involved. Essentially, taxpayers might have to foot the bill for disruptions caused by borrowers with politically connected, defaulted loans. Therefore, it’s crucial for the government to ensure that banks receiving any bailouts are held accountable for their performance.
Who guarantees that political interests won’t dominate the new board?
A robust and independent Bangladesh Bank is essential to ensure banking committees are not swayed by politically affiliated business entities, as has happened in the past. The success of the proposed merger framework hinges on having an independent, professionally qualified director. Given the bank’s history of political and business capture, past approvals and reschedulings of loans have often broken established norms.
Can we revive banks without modifying Bangladesh Bank?
Reviving the banks hinges on reforms within the Bank of Bangladesh itself. The central bank’s proposed reforms aimed at strengthening the banking sector can only take off effectively if there’s a strong and independent regulatory body. Without freeing regulators from political meddling, true revival seems unlikely.
Can the government really handle TK20,000 crore in this fiscal situation?
Currently, Bangladesh’s financial capacity is quite limited, with the tax ratio for the last fiscal year sitting at just 7.4%. Such low revenue collection falls short for funding key national development areas including health, education, social safety, and climate resilience.
Allocating TK20,000 crore for bank relief would require the government to recalibrate its budget, raising concerns about whether vital sectors will be compromised. Furthermore, the government must reassure the public that this financial injection into failing banks will be a one-time recapitalization.
Looking at the past, there have been instances of repeated recapitalization without significant consequences. It prompts the government to weigh opportunity costs carefully. The country has invested in social infrastructure, and without proper accountability, recapitalizing weak banks could merely reward corruption and perpetuate mismanagement.
