Corporate Governance in Private Banks: A Need of the Hour

Shaikh Rezanul Haque

16 September, 2019 12:00 AM printer

Corporate Governance in Private Banks: A Need of the Hour

Shaikh Rezanul Haque

Nowadays Corporate Governance (CG) is a much talked about subject all over the world, and in Bangladesh as well. CG is known to be a useful tool in matters pertaining to bringing accountability, transparency, ethics, and innovations for any business undertaking. Modern management and corporate governance seem to be synonymous – supplementary to one another. To dwell on CG, first, we should have a little grasp of what CG purports.

According to Organizations for Economic Cooperation and Development (OECD), corporate governance is a set of relationships between company management, its board, its shareholders and other stakeholders. CG is concerned with holding the balance between economic and social goals and between individual and commercial goals. It is designed to encourage the efficient use of resources and equally to require the stewardship of those resources. Moreover, CG seeks to enhance the value and acceptability of shareholders, employees, potential investors, customers, lenders, government and society at large through upholding ethical code and transparency.

In any undertaking, especially in the banking sector corporate governance is important because banks have an overwhelmingly dominant position in a developing economy. The bank is typically the most important source of finance and the main depository for the country's savings.

Bank deals with public money. As per regulations, sponsors have to come up with Tk. 400  crore to apply for a banking license but at times it may garner deposits exceeding Tk 4000 crore.  Obviously, there is a high ratio of debt to equity. To protect that debt governance is imperative. Banks are entrusted with the shareholder's money hence ensuring that good governance is of utmost importance. Then comes the issue of inter-connectedness of the financial system. Every bank has a part to play in the economic activities of the country. In absence of depositor's trust, it can "run on deposits", which may quickly spread like a pandemic to other banks, crippling the economy as a whole.

The understanding and practice of CG in Bangladesh's banking sector is still far from satisfactory compared to global standards. It is being increasingly discussed in various forums among entrepreneurs, bankers, corporate managers, academics, regulators, business leaders and policymakers with a view to providing better and effective service to all stakeholders. To that end there exist a number of challenges which are noted below:

First, the corporate ownership structure in Bangladesh's private banks is mostly dominated by family members. In our society individuals are placed in positions of power largely because of their family background rather than capabilities. Such practices stymie merit and worthiness to be appreciated. The recent changes in the Banking Company Act are a glaring example to this end, making the situation even worse.

Second, the educational background and experience of most board members are far from worth-mentioning. As such they find it hard to comprehend the inherent quality of corporate governance, let alone introduce it in their banks. The 'profit at any cost' mentality is problematic. The main objective of sponsors and management is profit. Maximization of shareholder's equity is not bad but this should not be driven alone by the profiteering attitude. Because profiteering propensity tends to jeopardize the practice of good governance. Considering employees as sales agents can only make things worse.

Third, poor audit reports hamper the growth of good governance. Audited financial reports are hardly reliable and more often than not they are prepared at the instructions of the owners with the result audit reports so they do not portray the actual financial health of the banks.

Fourth, the ineffective role of independent directors (IDs) is another challenge. IDs are required to be academics or senior bankers but there is a dearth of qualified skilled people. Independent directors, if selected by bank sponsors, do not always act in favour of good practices or work as an advocate of innovative ideas. Sometimes they work for the sponsor's interest, compromising the interest of the bank.

Fifth, there is inconsistency in the regulatory system. Inconsistency amongst the Company Act and Bangladesh Security Commission requirements also makes things complicated. Regulatory rules and norms ought to be consistent in order to make sure a smooth growth for the banking sector.

There is a lack of activism on the part of shareholders. General shareholders do not delve into the issues namely performance, strategy, future planning and disclosers of financial statements which in turn provide them a louder voice in the policy-making decisions. Far from giving any pragmatic thoughts at the annual general meeting, they are often found keen on achieving their personal interests.

For the last couple of years, most of the private banks in Bangladesh have been plagued with huge non-performing loans, gross irregularities and ever-expanding paws of corruption the like of which is never witnessed. To get rid of this plight there is no alternative other than introducing corporate governance in the private banks. To make it happen the following steps need to be implemented with urgency: 1) preparing and materializing the complete code of corporate governance in line with international best practices 2) strengthening disclosure requirements 3) ensuring the fiduciary duties  of the directors and the activities of the companies by improving the capacity of the board of directors 4) introducing E-commerce in dealing with day to day banking transactions and also building institutional capacity in preparing quality financial statements.

Banks, especially private banks, over the years, have been playing a pivotal role in advancing our economy. As such its role in building a robust economy can in no way be overruled. If this sector is beset with malpractices, as it is evident now, we can hold back towards our journey of becoming an upper-middle-income country by 2031. So all stakeholders – policymakers, bankers, business leaders, and academics should without delay come forward to make this sector more vibrant and functional. And corporate governance in this regard can contribute substantially.


                The writer is a columnist