It emerged this week that Bangladesh Bank (BB) has been writing to banks to ask them to bring down the number of directors from a family to three from the existing four. In doing so the central bank was asking the banks to comply with the directive as per the Bank Company (Amendment) Act 2023, recently passed into law, and to inform its Banking Regulation and Policy Department (BRPD) soon after reducing the number.

Earlier, the Bank Company Act 1991, following a much-criticised round of amendments just prior to the elections in 2018, allowed a maximum of four members from a family in the board of a bank at the same time. But the new law, which was passed in parliament on June 21, specified that the number of directors from a single family cannot be more than three.

The concerned directors should reach a mutual understanding if one of them has to resign from the board, said a Bangladesh Bank circular issued in this regard on Wednesday (July 26).

"If they fail, a lottery should be held in the board meeting to choose the director who would have to step down," it helpfully suggests.

The central bank said the issue should be settled within the shortest possible time and to let the BRPD know the update. Banking reforms have been called for by economists and institutional experts for ages, and certainly the Bank Company (Amendment) Act 2023 represented a golden opportunity to pursue its direction, but don't let the central bank's apparent urgency over reducing the directors fool you. As passed, the amendment round will mostly be remembered as one of missed opportunities.

Parliament passed the Act placed by Finance Minister AHM Mustafa Kamal on a voice vote, which saw the Jatiya Party walk out briefly in protest against a move to extend the tenure of the directors. The directors are now allowed to continue in their role for 12 years from the previous nine years.

Two step forward, three steps back

Several Jatiya Party MPs protested against the change. One of them, Fakhrul Imam, upon returning after the walkout mentioned that the provision on directors' terms was not in the original Bill, but was added following a motion by ruling party MP Ahsanul Islam Titu.

Another change brought to the Act is a provision allowing individuals or companies, who are deemed to have defaulted on loans 'unwillingly', to be eligible for more credit, with Bangladesh Bank's permission. But this is counter-weighed by a set of stricter measures for those considered to be 'wilful defaulters'.

As per the proposed provisions, the banks must send the list of wilful loan defaulters to Bangladesh Bank, which can then impose a ban on overseas travel against them.

Stricter measures are also related to the issuance of their (wilful defaulters') trade licence, and company registration under the Bangladesh Securities and Exchange Commission and the Registrar of Joint Stock Company and Firm, are included in the Act.

A wilful defaulter cannot be eligible to be a director of a bank or financial institution until after five years have passed after being excluded from the list of wilful loan defaulters. If any director of a bank becomes a wilful loan defaulter, Bangladesh Bank can declare his post vacant.

If a bank fails to send the list of loan defaulters to the central bank in time, the bank can be fined Tk50 lakh to Tk1 crore. The bank will have to count fines of an additional Tk1 lakh for each day's delay.

According to the draft law, despite having the financial ability, if a person or institution fails to repay a loan, it will be considered a wilful default. The definition of a wilful defaulter provided in the law states: "If anyone takes financial benefits from a bank or financial institution providing false information in their name or of their family members, the individual will be considered a wilful defaulter."

At the same time, if someone states a specific purpose for taking a loan from a bank or financial institution, but uses the loan for other reasons, the recipient will be considered a wilful defaulter. A provision is also included here so that Bangladesh Bank can regularly inspect different institutions and foundations run under the law.

But on the other hand, the mechanisms for evading the bill's provisions are almost written into the law itself. For example, according to a provision in the amended act, any sister concern or individual of any group is not a wilful defaulter if it is authenticated by Bangladesh Bank that there are logical grounds for defaulting on the loan.

These types of entities, individuals or companies, whichever the case may be, will be eligible for being granted further/ fresh loans subject to Bangladesh Bank permission and complying with the instructions thereon.

Prior to the Act being passed, economists mostly welcomed the introduction of a 'wilful defaulter' clause. Under the clause, such wilful defaulters can be subjected to various penalties. But they did warn that how a wilful defaulter would be dealt with under the draft still left some scope for ambiguity and failed to meet international standards, and some of those fears were ultimately justified by the inclusion of such clauses.

Thus the Bank Company (Amendment) Act-2023 falls short in some crucial ways necessary to establish accountability and good governance in the banking sector.

The drafting of the act fails to adequately address the influence over decision making enjoyed by sponsor-directors of a bank or their families. Single-family directors would still be able to control a bank through reciprocal understanding over time, precluding the bank's board of directors from performing its three main functions of protecting the interests of depositors, minimising loan defaults, and investing in ventures with good rate of returns through the loan approval and disbursement process.

Experts had opined prior to the law being passed that the government must define how wilful loan defaulters would be dealt with in accordance with international standards, and to reduce the number of single-family members allowed on the board to two with a maximum tenure of six years each, from the existing four with a maximum tenure of nine years each.

In the end that law was passed to bring it down to three, but the controversial late amendment extending the maximum length of their tenures to twelve years from nine, more or less renders the first change ineffective.

Peddling influence

Economist Dr Fahmida Khatun, executive director of the Centre for Policy Dialogue told our sister newsagency UNB prior to the act: "I think allowing two members of a family in the board of directors would be correct - I don't understand why it has been kept at three (in the draft act)."

When a bank is run by several members of the same family - there is virtually no obstacle in decision making by the director whose family dominates. Keeping this in mind, earlier the Bank Act of 1991 allowed just two directors from one family and banks were run better, she said.

"Basically, it was to ensure the internal good governance of the banks. The Banking Company (Amendment) Act-2023 may fail to deliver good governance due to a lack of desired reform," she had said.

According to CPD, the amount of defaulted loans in the country's banking sector has more than tripled in the last ten years, from Tk 42,725 crore in 2012 to Tk 134,396 crore in the current fiscal, and is increasing gradually.

In any bank, approval of large scale loans comes from the board of directors. Managers are apprehensive about opposing their decisions as paid officials. The scope for opposing fraudulent loans is increased when families dominate the board.

The trust of ordinary depositors could have been restored through reducing family authority in decision-making and exemplary punishment for defaulters and those who facilitated money laundering through forged loans. It is not an issue to be taken lightly.

Bank officials say that one of the major reasons for non-payment of defaulted loans is the approval of large-scale loans to the private sector without adequate verification of documents. One of the main reasons behind the increase has been loans obtained through forged documents, often in the name of companies that don't exist.

Former IMF economist and executive director of the Policy Research Institute (PRI) Dr. Ahsan H Mansur said how wilful or habitual defaulters would be dealt with should be brought up to international standards. The way he explained it, in the drafting of the amended act, an individual will be considered a wilful defaulter if he or she does not repay a loan taken in their name or their company's name despite having the means to pay it back. In addition, any person will be treated as a habitual defaulter if he or she takes loans under the name of a non-existent company, and some other similar provisions.

But those who are deemed as wilful or habitual defaulters by the confirmation committee of banks can appeal to the central bank within 30 days from the submission date of their names. The central bank will make the final decision on whether the aggrieved persons will be enlisted in the list of habitual defaulters, and this leaves scope for influence-peddling, it is felt.

"The risk can be understood by looking at the amount of defaulted loans of a country. Risk cannot be understood by defining it through your own chosen method instead of international standards. This will lead to a crisis of international acceptance for the banking sector," Dr Mansur, also the chairman of Brac Bank, added.

He thinks that there is still scope to amend the Act if the government wishes. The law should be made of international standard as Bangladesh's involvement is growing in international trade, Mansur said.

Former Governor of Bangladesh Bank Dr Salehuddin Ahmad said, "Different areas (of the bank) are controlled by the family and those who are in the management of the bank are also afraid of them (family members)."

If there are multiple board members of the same family, then there is no transparency and accountability in making decisions, he said.

Besides, if there is more than one bank under the ownership of the same family, the case of one bank taking benefits from another bank is also seen in Bangladesh, he pointed out.

"The directors of this bank will take favours from another bank, that bank will take favours again from another bank. This needs to be addressed," the ex-governor said.

In the aftermath of the amendments being passed, Dr Fahmida Khatun has written a column in the Daily Star questioning: 'Will it do more harm than good?' On the weight of the evidence she provides, the answer is in favour of the former, it has to be said. In it she has also indirectly endorsed the position of the Jatiya Party MPs, without referring to the incident in Parliament. Speaking of the same amendment, she writes:

"Strangely, this amendment to the tenure of bank directors was not in the original draft prepared by the Bangladesh Bank. Passing such an important change in the bank company law without any proposal from the central bank, and without any discussion in parliament by the public representatives, is unprecedented. This simply reflects the power of bank directors, some of whom are also connected to politics (sic) and have an active interest in approving biased and weak policies."

The MP who proposed the amendment, Ahsanul Islam Titu, is a prominent business leader and capital markets guru with a long history of involvement in the financial sector of Bangladesh. He is also the son of the late Awami League (AL) Advisory Council Member and influential leader Mokbul Hossain, who passed away in 2020 from a coronavirus infection. In 1998 Titu was the convener of "DSE Automation Process Committee". Furthermore, from 2005 to 2010 he was a member of the executive committee of the Bangladesh Insurance Association (BIA) and in 2012 was the vice president of BIA. Titu was elected as the president of Dhaka Stock Exchange in 2013. Prior to that, he held the position of senior vice president of DSE.

Why it matters

It is regrettable that the reforms have been botched at a time when Bangladesh's economy, for very valid reasons, is subject to greater international scrutiny. Emerging out of LDC status carries with its own burdens, that we must prove ourselves capable of handling. A more disciplined financial sector is definitely one of the most important challenges that will have to be borne in the coming years.

It was only in March that International credit rating agency Moody's Investors Service downgraded its outlook for Bangladesh's banking sector to 'negative' from 'stable' on the heels of various alleged scams, irregularities and the piling up of massive non-performing loans in the banking system.

In its report, Moody's said that the outlook slid to negative as asset risks increased and the liquidity situation had tightened in the country. The impact of this negative outlook was concerning, experts said at the time, as it might further erode the confidence of investors and foreign institutions in the banking sector of Bangladesh, making it more difficult for the country to attract foreign investment and obtain loans at reasonable rates.

Soon after this, Moody's downgraded Bangladesh's sovereign credit rating, in June. A sovereign credit rating is an independent assessment of the creditworthiness of a country or sovereign entity and how risky investing in it might be. At Ba3, Bangladesh had the lowest rating Moody's offers for 'speculative' grade bonds. B1 is the highest credit rating from Moody's for what are still considered 'non-investment grade' bonds. B1 signifies that the issuer is relatively risky, with a 'higher than average' chance of default.

In its rationale for the downgrade, Moody's assessment was that Bangladesh's heightened external vulnerability and liquidity risks are persistent, and that, together with institutional weaknesses uncovered during the ongoing crisis, the sovereign's credit profile was consistent with a B1 rating.

The institutional weaknesses and liquidity risks that Moody's mentioned were directly related to the banking sector. But the willingness to reform clearly still evades us.