It is reported in many prominent dailies that the government is going to issue license to set up three new private commercial banks. This issue has turned into a hotbed of debate among the policymakers and analysts. The center of the debate lies on the question as to whether these new banks can contribute to achieve the goal of financial inclusion which is still a far cry for Bangladesh.
According to the World Development Indicators (WDI), 31 percent of the adult population (age 15+) of Bangladesh has bank account compared to the South Asian average of 46.4 percent. The respective estimates for adult living in rural areas account for 25.6 percent and 43.5 percent. Only 9.9 percent of the total population on average borrows from the financial institutions which is slightly higher than South Asian average (6.4 percent).
However, the percentage of adult population who saves idle fund in financial institutions is very appalling in Bangladesh (7.4 percent) compared to South Asian average (12.7 percent). Among the recipient of foreign remittance, only 8.6 percent have received the remittance through the financial institutions which is almost half of South Asian average (15.8 percent). This statistics prove that Bangladesh has a lot more to achieve to accomplish its goal of financial inclusion. Can new banks play a critical role in this regard?
No doubt, new banks can offer a lot of benefits. During the time of liquidity shortage, fresh capital provided by owners (especially sponsor directors of proposed banks) who have surplus funds to be employed in the economy is helpful. Such fresh fund, besides increasing the money flow in the economy, is believed to soothe any liquidity hardship in the financial market. However, we should note that the owners provided capital constitutes only three percent of deposits as per the statistics of 2016.
At the same time, the financial system of Bangladesh is reasonably liquid and stable at present except some hiccups involved with a few banks. On the other hand, accumulated idle money in the banking system forced the government to impose excise duty on deposit which was abolished subsequently in the face of serious criticism from the practitioners and intelligentsia. This means that the embedded advantage of fresh capital is absent.
Probably the most important benefit new banks may accompany to the economy is the product diversification. Financial products in Bangladesh are not well diversified. Entrepreneurial skills brought along with the management of new banks are expected to open new avenues for financial service providers and hence tap that segment of the population which at present is poorly served.
Otherwise, conventional banking strategy currently practiced by commercial banks might not allow new banks to profitably compete with the existing banks. New banks thus, need to focus on some unexplored market in the economy as well as increase efficiency in terms of service and costs. However, the performance of newly established commercial banks casts a serious on this proposition. Instead of creating new market or innovative products these banks are competing for the share of an existing pie.
Another possible benefit that may result from new entry is that the new banks will intensify the degree of competition in the deposit markets which is expected to yield a higher interest on deposits. This may motivate depositors to save more by deferring their current consumptions to the future. While this proposition remains valid, we should understand that increased competition can have an overall debilitating effect on the financial system.
In a country like Bangladesh, majority of the population have a meager income which means that there is nothing left for savings after meeting the expenses. At this circumstance, competition for attracting deposits from a small base of depositors is sure to increase the cost of funds for banks. For survival, bank needs profits and a lion share of their income comes from interest income. In search of profit, banks are forced to increase the lending rate.
What we should not forget is that banking is not like other industries that set the price of products based on the demand and supply. In the context of banking, banks are unlikely to grant loans to reckless borrowers even if they agree to pay higher interest. Instead, the lenders carefully screen creditworthy borrowers from the pool of applicants. Needless to say, the bunch of creditworthy borrowers in Bangladesh is not huge in supply.
Thus, banks have limited scope to extend their collected funds to the borrowers with reasonable assurance of repayment. Perhaps, this justifies the accumulation of huge idle fund in the financial system. It is not that the depository corporations are able to collect a sizable level of deposit but rather the creditable lending market is small. In this small market, cut-throat competition may result in excessive risk taking by banks.
If so, depositor's interest would be at stake and the very purpose of providing deposit insurance may turn into a failure. Thus, depository corporations have to put their best effort to protect the welfare of the depositors by avoiding excessive risk and uncertainty.
Moreover, supervisory capacity of regulatory authority is always at the center of question in Bangladesh. Two phases of stock market turmoil have generated a host of interesting questions regarding the regulatory oversight as well as the regulatory capacity. It has been observed from many financial incidents that the regulatory oversight is compromised not because of complex financial products or technology introduced by new banks but because of political pressure. Most banks are owned by individuals or families affiliated with mainstream political parties.
It is alleged that loans are sanctioned by the directives of these concerned individual or family members by political considerations even if the viability of the borrowers is questionable. This has given rise to endemic default culture in the banking industry. What is mostly shocking is that a good percentage of these defaulters do not repay their borrowed amount intentionally and they simply remain out of regulatory radars because of the existing legal loopholes.
History is replete with examples that banks have been recapitalized in various occasions by injecting taxpayer's money. Under the existing regulatory and financial environment it is uncertain how these new banks can harness financial deepening of the country.
The reality of the financial system in Bangladesh actually demands the opposite, bank merger. Hardly any of our existing banks comes into international comparison in terms of financial asset which means that they have apparently failed to capitalize on economies of scale.
May be this phenomena can explain the poor presence of banks in the rural areas where their absence is felt more for the purpose of financial inclusion. New banks can be beneficial if they expand their operations in the rural areas. However, given the 'commercial' nature of these banks it is unlikely that they would endeavor to tap the unbanked or marginalized rural customers. Merely competing to capture a share of the existing pie without increasing its size won't create any apparent benefit at least in social terms.
The writer is an Assistant Professor and Head, Department of Economics and Finance, University of Nizwa, Oman
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