Banking in Five Decades and Today’s State

The banking sector in our country has passed five decades with many ups and downs, and there are both achievements and failures. This long phase of five decades in the world’s financial market has been marked with revolutionary changes, innovation and drastic transformation. Unfortunately, the banking industry in our country has not been able, in many ways, to keep pace with the progress taken place in the developed and even emerging markets during this course of time. The country’s banking has lagged in many respects compared to the international and regional standard.
Banking of innovation and modernisation: Banking and finance is a service industry that constantly goes through changes, upgrades and innovation. From traditional banking to online banking, digital banking, virtual banking and finally AI-driven superintelligence banking, everything has occurred during these last five decades. Even cryptocurrency, virtual currency viz. stablecoin, and even tokenised deposits are now penetrating the banking industry. Although these sophisticated financial products have just commenced in the developed market, particularly the USA, they are expected to be penetrated soon in other markets of the world. 
Significant diversification in banking products: In the banking industry, services in the form of only deposit and lending have transformed into multipurpose and well-diversified products, which have now turned banking into everything and everyday banking. Products and services being offered by the banking industry are now catered to all types of financial needs of the people. Banking products have undergone great diversification with the onslaught of innumerable hybrid as well as derivative products during the last five decades. Even during this period, banking product diversification and upgradation were so intense that banks’ core functionality, which includes deposit mobilisation and lending activity, has dropped to several layers below. 

Specialised banking and beginning of NPL: After independence, two specialised financial institutions were established in Bangladesh, of which one is Bangladesh Shilpa Bank (BSB) and another is Bangladesh Shilpa Rin Sangtha (BSRS). The objective of establishing these two specialised financial institutions was to support industrialisation through extending mid-term and long-term credit facilities. To what extent the purpose of establishing these two specialised financial institutions has been achieved is now known to us. However, these specialised financial institutions have bred the culture of Non-Performing Loans (NPL), because people obtained credit facilities from these banks in the name of establishing industries, but most did not repay. With the operation of these two financial institutions, people have learned how to avoid repaying banks’ loans, which is what is now today’s NPL culture. Eventually these two specialised financial institutions, which were sinking with the excessive burden of NPL, have been salvaged by converting to regular commercial banks.
Private sector banking: good start with failure: The last two decades of the last century were the most remarkable period in the country’s banking history, because during this time not only did private banking commence, but also a number of banks and financial institutions increased significantly. First, second and third generation banks have come into the market during this period. Transforming banking from the nationalised sector to the private sector ushered big hopes in the financial market, and of course, there was a good start. Initially, private banks were able to demonstrate better performance than nationalised banks. Because of private banking, it was expected that banking access would reach the doorstep of common people, which seems to have occurred to some extent but ultimately became the banking of elite clubs. Without establishing stringent control, monitoring, and oversight, particularly without ensuring good practice, opening the financial industry to the private sector has not produced the desired result. 
Moreover, private banking commenced well ahead of the private sector economy getting a strong foundation. More importantly, private banking was started before the market was ready for that change. Consequently, the country’s financial industry could not reap the benefit of private sector banking and rather experienced a worsening situation in the entire banking industry. The private sector banking is blamed for creating today’s banking chaos and mammoth NPL.  
Two reform programmes without fruitful results: The last five decades of banking have undergone two major reforms, of which one is Financial Sector Reform Program (FSRP), while the other is sectoral reform, which includes Credit Risk Management (CRM), Asset-Liability Management (ALM), and Internal Control and Compliance (ICC). FSRP was undertaken at the beginning of the 1990s when three key practices, which include Classification of Loans (CL), Credit Information Bureau (CIB) and Lending Risk Analysis (LRA), were introduced in the industry. LRA has not produced any fruitful result and, as such, has been abandoned after a while. However, CL and CIB have been continuing in the industry, although CL has not come to any use of curving NPL; rather, it has been held responsible for rising NPL. Because of CL, NPL could not be treated properly, and even an enormous shortfall of provision is the result of exercising CL in calculating provision. CIB has been claimed to be the most successful exercise. However, much better benefit could be derived from CIB if proper updates could be carried out, converting this into a credit scoring system with reflection of every action of the borrower’s loan account, including each draw and repayment. Sectoral reform comprising CRM, ALM and ICC was a good initiative but miserably failed as digital approaches were implemented with manual methods.   

Too many banks for too few good customers: During the last fifty years, the banking sector’s only achievement is significantly rising the number of banks and non-bank financial institutions, which has exceeded the milestone number “hundred”. So many banks and financial institutions are hardly found in any country of emerging markets. Even, except for America, no other developed country has so many banks and financial institutions. Not only that, but banking service has reached the far-flung area of the country. There is hardly any upazila or village where there is no branch of the bank. Technically, the entire country has been connected with the banking network, which is, of course, a spectacular achievement. However, quality customers who usually receive banking services complying with rules and regulations have not kept pace with the development of the banking network. Most customers intend to receive everything easily and freely. Whereas banks deal in money, so strict compliance from both bank and customer is inevitably required, but most customers in our country are not willing to comply with banking rules. Specifically, borrowers’ performance, particularly executing loan documentation and debt servicing, is very dismal and undesirable. As a result, the number of good customers for banking businesses is very limited as opposed to so many banks and financial institutions, which has created an uneven situation where too many banks chase too few good customers. 
The last two decades created a big mess in banking: The last two decades of banking have gone through unprecedented consequences. Credit risk management has almost collapsed, opening the door of bank money for some unscrupulous people. Loan defalcation, syphoning off money from banks, opening fake accounts for taking loans, and non-repayment of loans became rampant in this period. Many incompetent bankers have reached the highest level of banking careers through sycophancy and flattering the board of directors simply for serving their ill purpose. Bangladesh Bank’s oversight has also lost its standard. Even there is an allegation that the central bank has adopted some policies, viz., ten board members from the same family, which has gone in favour of bank plunderers instead of establishing more control and supervisory oversight. Consequently, banking norms have almost broken down and thus created a big mess in the country’s financial sector. 
Interim government’s created historic banking failure: During the interim government, an expectation was created among the people that the country’s banking sector would be streamlined and restored. A renowned economist who has working experience in the International Monetary Fund (IMF)   and is aware of the country’s banking sector, as reflected in his TV talk show and in the discussion of different forums, was appointed as Governor of Bangladesh in anticipation that he would be able to restore the country’s dilapidated banking sector, which he has miserably failed. Instead, some imprudent actions undertaken by him have caused some unprecedented situations, which the country has never experienced before. During his tenure, a merger of five weakest banks was initiated without exploring suitable alternatives, which has turned into chaos. He has enforced a highly standard debt-servicing practice, which is mostly followed in the developed world’s banking, where a very high standard is followed. In the country’s debacle loan operation, what has worsened the overall loan operation is skyrocketing NPL in the country’s banking sector. During his tenure as governor, the country has experienced that some banks have failed to return depositors’ money, which is an unprecedented instance in the country, casting a long-lasting impact on the financial industry. 
Can banking be restored? After five decades of ups and downs in the country’s banking sector, is there any way to restore this industry? Perhaps, there is no straightforward answer to this question. The reality is that the whole banking industry has fallen into the most difficult situation but has not ended, so there is still hope to streamline and restore this industry. Our country’s banking industry has experienced the most negative and detrimental situations, but the positive side is that our market is banking-friendly and people’s propensity to save is very high, which provides the strong premise of running the sound banking system. Despite so many negative consequences, people have trust in banks and continue keeping their savings in the banks. What is one of the most prerequisites for surviving banks? Besides, banking is now envisaged as an essential service without which people can hardly maintain their daily lives. So, industry rendering essential services to the people can, of course, be restored and streamlined to some extent. However, for doing so, some holistic measures and drastic actions are inevitably required, for which strong political will and commitment are inevitable. Elaboration on how this can be done requires extensive analysis and discussion, the scope of which is limited here.
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The write is a certified anti-money laundering 
specialist and banker based in Toronto, Canada. 
He can be reached at [email protected]