Bangladesh Bank Proposes Major Banking Law Reforms
Bangladesh Bank is suggesting significant changes to the nation’s banking regulations, aiming to address ongoing issues tied to governance failures notably impacted by family control, political influence, and lenient loan regulations.
The revisions, outlined in the latest draft of the Banking Corporations Act, seek to enhance stability in a sector significantly weakened by prolonged loan fraud and rising bad debts over the last two decades.
A central point of the proposal focuses on diminishing the influence that powerful families and individuals have over banking operations.
To limit this influence, Bangladesh Bank is suggesting that the number of committee affiliates remains at five or six, effectively curtailing family control in banking management. Additionally, it proposes shortening the term of office for directors from 12 years to 6 years.
This kind of control by board members has severely harmed the banking sector for the past 15 to 20 years, especially during the Sheikh Hasina administration, resulting in widespread loan fraud and the decline of public trust and funds.
Some conglomerates, specifically S Aram, have gained control over multiple banks, leading to further concerns.
In its revisions to the Banking Corporations Act, the central bank wants to prohibit political figures from serving on bank boards, ease restrictions for foreign investors in stockholding, limit individuals from having large stakes in multiple banks, and treat all defaults similarly.
The proposed changes aim to improve corporate governance, foster transparency in board appointments, and protect the banking sector’s stability.
Bankers and economists emphasize the need for these reforms, particularly to curb family and political influences in banks.
Rumee Ali, a former lieutenant governor of Bangladesh Bank, welcomed the changes but stressed that regulators must be diligent in their enforcement.
Zahid Hussain, previously a lead economist at the World Bank in Dhaka, noted that family management has contributed to the failure of numerous banks and suggested that limiting directors from five to two could help manage ownership conflicts within board decisions.
The Banking Corporations Act was last modified in 2023, which allowed up to three family members and two affiliates to sit on a bank’s board.
During Sheikh Hasina’s 16-year government, banking laws have been amended three times, each time further impacting the sector negatively.
The first amendment in 2003 removed the six-year term limit for directors. A subsequent 2013 amendment reintroduced this limit under IMF advice, permitting directors to extend their tenure by an additional six years. In 2018, it was elevated to nine years, and it was further extended to 12 years in 2023, allowing certain resets that could enable some individuals to serve on the board for nearly 30 years.
Ban on Politicians from Banking Committees
The new proposal includes a ban on politicians, especially ministers and local council members, from occupying roles as bank directors.
It also aims to reduce the maximum number of banking firms from 20 to 15 while requiring at least half of the board members to be independent directors, as stipulated by Bangladesh Bank.
Additionally, the proposal aims to limit shareholders’ voting rights so that no individual or entity can vote beyond 5% of the total vote if they own more than 5% of a bank’s shares.
Relaxation of Stockholding Limits for Foreign Investors
The draft seeks to loosen the stockholding constraints to attract strategic foreign investments. Currently, individual ownership is capped at 5% and can go up to 10% when including family shares. Bangladesh Bank intends to explore foreign investment opportunities, including potentially merging several Islamic banks.
According to the Bangladesh Bank governor, foreign investors could obtain full ownership of a bank if they desire.
Reforming Stockholding and Ownership
The intention is to tighten stockholding rules to eliminate loopholes that allow conglomerates to control multiple banks.
New amendments would prevent any individual from holding significant shares across multiple banks.
Under current regulations, no one can serve as a director in more than one bank or its subsidiaries, but some business entities have bypassed this by appointing directors through company names, leading to corruption and bank failures, such as in the case of the Islami Bank.
Following a government change, Bangladesh Bank moved to seize all shares linked to the S Alam Group and is working to prove their indirect ownership in court.
In December 2024, the central bank initiated a plan for enhanced transparency regarding bank ownership structures.
The new amendments emphasize closing loopholes and addressing the issue of individuals wielding control over several banks.
Removing Distinction Between Defaulters
The draft intends to eliminate the differences between general and willful defaulters, ensuring both categories receive equal treatment while also removing privileges that currently allow general debtors to access group loans.
The term “willful defaulter” was introduced in 2023, leading to significant criticism. Under this definition, those who fail to service loans despite having the financial capacity are categorized as willful defaulters.
Previous rules exempted group companies from being labeled as defaulters if their issues arose from legitimate circumstances, allowing them to secure new loans with Bangladesh Bank’s approval.
The 2023 amendment allowed certain groups to claim exemptions simply by indicating valid reasons for defaults, enabling members within the group to receive loans even before being formally deemed as willful defaulters.
The new amendment aims to dismantle this framework entirely.
Zahid Hussain remarked that unifying the definitions of defaulters could improve banks’ balance sheets and streamline approaches to handling default cases.
Rumee Ali expressed agreement with the move to eliminate these categories, citing that they have bred opportunities for misuse within the sector.
Appointment Regulations for State-Owned Banks
The amendment will mandate that state-owned banks abide by the same appointment rules for directors as private ones, with the goal of enhancing governance in state and specialized banks.
Right now, government-appointed directors often contribute to mismanagement within state banks, exacerbating capital shortages due to defaulted loans and corruption funded by taxpayers.
Expert Consensus on Proposed Changes
Experts see these amendments as conducive to better governance, with feedback suggesting they align more closely with international standards.
Mamun Rashid, a banking expert, pointed out that effective independent oversight requires that essential committees are led by independent directors who prioritize dividends and market goodwill over personal interests.
While these reforms are praised, there’s a consensus that thorough consultations are needed with stakeholders to ensure implementation is effective and enduring.
Mustafizur Rahman echoed the sentiment, emphasizing that restoring excellent governance is vital for the banking sector, particularly in light of long-standing issues tied to family control and board governance. He added that real change hinges on the independence and accountability of Bangladesh Bank, beyond political and bureaucratic interference.
United Commercial Bank’s Chairman Sharif Zahid expressed support for capping family directors but recommended maintaining a longer tenure with performance assessments to facilitate sustained governance initiatives.
Though he backs stringent actions against fraud, there’s concern that removing the distinction between defaulters might hinder potential remedies for genuine borrowers.
He stated that effective governance requires intention and execution, proposing a framework where sustained tenure alongside rigorous evaluations would bolster bank integrity and shareholder interests.
Mehmood Husain, Chairman of IFIC Bank, finds the proposed amendments necessary for establishing better governance and ensuring depositor safety, reinforcing that all defaulters should be treated equally.
