Published:  12:21 AM, 16 April 2019


Prime Minister Sheikh Hasina expressed dissatisfaction over higher interest rate of Bank loan despite her instruction for single digit interest rate and the Ministry of Finance, Banking division and Bangladesh Bank could not compelled the private commercial Banks to reduce the interest rate.

A regulatory authority is a public authority responsible for exercising autonomous power over some particular sectors to formulate policy and implementing those policies to keep the sector perform with a desired objective. It should be independent from other branches or arms of the government. Central Bank is a very important such regulator to facilitate discipline in the financial sector. 

Central bank is use to create by law of the land. The modern banking system provides central banks with considerably more rights and responsibilities. It has authority to monitor and control the commercial banks and regulate them to maintain financial stability in the economy. Financial stability is of paramount importance for any economy to be able to prosper.

The authority of central bank puts it in a position to ensure healthy competition that is beneficial to the consumers but not detrimental to the banks themselves. The promulgation of regulations by the Central Bank is typically a response to a perceived market failure, safeguard interest of country, ostensibly to serve the public interest.

The most important regulatory power that a central bank has is regulating the reserve requirements of commercial banks. It is the percentage of deposits that any commercial bank has to maintain with the central bank. Thus, if this percentage is increased, commercial banks have to deposit a larger portion of their money with the central bank and have a smaller percentage to lend out to the market. Central bank can reduce the money in the market and resulting increase in interest rate.

On the other hand, if this reserve requirement is relaxed, banks get more funds to lend and as a result the interest rates will go down given the abundance of funds. Since the central bank sets the reserve requirements, it is in a position to have a significant influence on the operations and profits of commercial banks. The central bank can simply regulate the behavior of the commercial banks to suit the national interests by modifying the reserve requirement rates.

Central Bank have to confront a number of challenges the most important of which are regulatory capture inducing forbearance, a constant flow of financial innovations many of which are designed to evade regulation, fractionalized regulatory institutions, political pressures.

In contrast to rule and regulation, at present the owners of Banks in Bangladesh appear to have influenced the central bank, ministry of finance and Parliament to formulate the law and policy in their favor. Within the last few years, there is some significant change in law and policy to allow some owners of Bank to get control over the economic activities of the country.

They are now influencing the policy of the government and central bank. The Banking companies act has been amended to accommodate 4 instead of 2 directors from single family. The tenure of directors has been extended to consecutive 9 years from 6 years.

Minister and Governor of central bank seems taking policy decision at the meeting with owners of banks. It was not a mere consultation with the stakeholders. During last tenure of government, the then Finance Minister Mr AMA Muhith and BB Governor had 'discussed' about the CRR reduction initiative in a meeting with the Bangladesh Association of Banks. Accordingly, Bangladesh Bank (BB) has revised the Cash Reserve Requirement (CRR) at 5.5% for commercial banks on bi-weekly average basis from the existing 6.5%.

The central bank has re-fixed the repo interest rate from 6.75 percent to 6 percent. The repo interest rate determines the rate of interest a commercial bank has to pay on a loan from the Bangladesh Bank. The CRR determines the amount of deposits to the bank that it has to keep as a reserve with the central bank. The central bank has also reduced the 6 percent daily basis of average total demand and time liabilities down to 5 percent.

Thereafter, Governor of Bangladesh Bank called a meeting at a hotel for owner of Banks, official of Ministry of Finance for discussion on keeping deposit of government departments.

According to decisions made through a tripartite meeting, the government organizations has been instructed to keep 50% of their funds in private banks, which were 25% of total deposit. Secondly, the Cash Reserve Ratio (CRR) in private banks will be lessened by 1%. Banks will be getting a large amount of extra money when these decisions are implemented.

The nation has seen some dramatic changes in ownership of some commercial banks and the story published in media is alarming for the financial sector. As reported, about 6 banks have been taken over by a particular family. Interestingly, in one occasions, the Governor of Central Bank stayed at office up to 11pm at night to give approval of those dramatic resignation and appointment of Chairman and Directors of some Banks on the same day as reported in the daily newspaper.

Bank owners have influence of Budget preparation as well. There was a long time demand to reduce corporate tax but in the budget of current year's proposal was to reduce corporate tax of banks from 45% to 42.5% but no change of corporate tax of other sectors and Parliament has accepted the proposal.

Last year, in a meeting of Banker's Association of Bangladesh has decided to bring down interest rate on deposit to 6% and 9% on loan. But they also insist immediate deposit of government fund to place in their Banks @6% interest although such change in interest rate was supposed to regulate or formulate by the mechanism of Bangladesh Bank. These '9-6 game' shows the strength of owners of bank in Bangladesh.

Government uses power to compel its subjects to pay taxes and follow rules. That power of coercion can be deployed in such a way as to help some individuals and industries at the expenses of others.

By trying to influence how the state uses its coercive authority, businesses seek to "buy" one or more of government's four main products: subsidies; control over competitive entry; regulation of product substitutes or complements; and the fixing of prices.George Stigler, the noble laureate economist was the first to note that businesses seek to influence regulatory agencies to their advantage. The 'Theory of Economic Regulation' published in 1971.

Wherein Stigler argued that regulation is a product that, just like any other product, is produced in a market, and that it can be acquired from the governmental "marketplace" by business firms to serve their private interests and create barriers to entry for potential competitors. He forcefully argued that regulation is instead "acquired by the industry and is designed and operated primarily for its benefit".

He has challenged the idea that regulation arises solely to serve the public interest and demonstrated that important political advantages held by businesses can contribute to industry capture of the regulatory process. Stigler also illustrated his insights with empirical evidence from state-level regulatory schemes, including trucking regulation and occupational licensing.

A significant insight emerging from capture theory is that a regulator may act, either intentionally or unintentionally, in a way that results in personal or institutional gain. The extent of regulatory capture depends to some degree on the intensity of interest among those affected.

Regulated firms may have much at stake in regulatory activity. Consumers, though, will have a small or diffused stake in the outcome. Stigler noted that "the state has one basic resource which in pure principle is not shared with even the mightiest of its citizens: the power to coerce" but with the regulatory capture regulator and government fall at the prey of influential market players.

Regulatory capture in financial sector occurs when regulators become, at least partly, advocates for the financial institutions they are supposed to regulate and supervise rather than being strict enforcers of rules.

This leads to lose application of regulatory rules, forbearance to regulatory infractions resulting in poor application of supervision. Frequent personal moves of individuals between regulatory institutions and the private financial sector, relatively higher pay in the private sector, limited tenures, political pressures and human nature combine to encourage regulatory capture and supervisory forbearance.

Stigler's Theory article brought to the foreground what remains one of the most vital questions about regulatory institutions: how can they be made to work better to advance public welfare.An essential insight of Stigler and other economists who followed his lead was that all players in the regulatory regime: firms, bureaucrats, interest groups, and legislators - act as economic agents who have the interest and opportunity to advance strategic actions.

More than forty years have passed since Stigler published 'The Theory of Economic Regulation'. Much has changed during this time in the global economic policy of open up and less regulatory regime, but policy makers still know too little about how to design regulatory institutions to resist capture and enhance the broader social welfare.

The writer is a legal economist.
Email: mssiddiqui2035@gmail.com

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