The current government is backtracking on several reform proposals put forward by Bangladesh Bank (BB) during the interim government to reduce the influence of family interests in private banks.
The new draft would allow up to three members of the same family to serve as bank directors, as sought by bank owners. It would also take a less stringent approach towards directors who are loan defaulters.
Under the Bank Company Act, up to three members of the same family can currently serve simultaneously as directors of a bank. During the interim government’s tenure, Bangladesh Bank proposed reducing this number to two.
It also proposed limiting a director’s consecutive tenure to six years. Under the current law, a person can serve as a director of the same bank for 12 consecutive years. After completing that term, the person can return to the board following a three-year break.
A review meeting on the draft Bank Company (Amendment) Act was held on 20 September, chaired by Financial Institutions Division Secretary Nazma Mubarek. Representatives of Bangladesh Bank, various ministries and divisions, the Bangladesh Association of Banks (BAB) and different business organisations attended the meeting.
Asked about the matter, Nazma Mubarek told Prothom Alo on 4 October that the views of all relevant parties had been sought. However, nothing had been finalised. Bangladesh Bank would review the draft further and submit it, after which it would be sent to the Cabinet for approval.
At the meeting, the Financial Institutions Division initially favoured allowing three directors from the same family at each bank, instead of the proposed two, and extending the maximum consecutive tenure from six to nine years.
Sources said the BAB opposed the interim government’s proposals at the meeting, arguing that reducing the number of directors from a single family could disrupt the ownership structure of banks and the normal functioning of their boards. It said such a decision required careful consideration.
The BAB maintains that what banks need are directors who are attentive to and committed to their institutions. Shortening directors’ terms, it argues, would lead to a loss of experience and send a negative signal to the banking sector. If the tenure is to be reduced, the maximum could be lowered from 12 to nine years instead.
BAB Chairman Abdul Hai Sarker told Prothom Alo on Wednesday night that the draft prepared during the interim government’s tenure contained numerous inconsistencies.
The association had submitted its views, but they had not been fully reflected in the draft. He said the BAB had presented its position to the current government and, as far as he understood, its views were being incorporated into the new draft.
Asked about the possibility of creating more scope for family influence in the banking sector, Abdul Hai Sarker said the association hoped the government would safeguard the overall interests of the sector in the new legislation.
Analysts, however, disagree with the BAB’s arguments. They point out that allowing directors to remain in office for extended consecutive periods in the past helped entrench family control and contributed to the banking sector’s current distress. Before 2018, directors could serve for six consecutive years. The limit was raised to nine years in 2018 and extended further to 12 years in 2023.
The proposed amendment to the Bank Company Act sparked uproar and disorder in parliament in 2023. On 8 June that year, then finance minister A H M Mustafa Kamal introduced the Bank Company (Amendment) Bill 2023.
The original bill contained no proposal to change the length of directors’ terms. Shortly before the bill was passed, ruling-party MP Ahsanul Islam unexpectedly moved an amendment proposing a 12-year consecutive tenure for directors. That amendment was passed.
At the time, opposition Jatiya Party MPs staged a walkout in protest. Mujibul Haque, then a Jatiya Party MP, told parliament that National Bank and EXIM Bank had been ruined by their chairmen and directors, adding that bank directors were the principal perpetrators of looting in the sector.
In effect, the Awami League government allowed directors to serve for 12 consecutive years in 2023 at the behest of bank owners close to the government. Behind the move was Nazrul Islam Mazumder, former BAB president and chairman of EXIM Bank. He is now in prison. Former finance minister A H M Mustafa Kamal has left the country, while former Bangladesh Bank governors Fazle Kabir and Abdur Rouf Talukder have not appeared in public.
There have been allegations that, during the ousted Awami League government’s tenure, several business conglomerates—including S Alam Group, Beximco, Premier Group and Sikder Group—exercised control over banks and financial institutions and engaged in widespread irregularities and corruption. Directors associated with these groups placed not only themselves but also their spouses, children, sons-in-law and other close relatives on bank boards.
Some banks controlled by a handful of families are now in distress, leaving depositors unable to withdraw their money. The government is consolidating five such banks into a new institution called Sammilito Islami Bank. The government has injected Tk 200 billion in capital from the public treasury into the merged bank, using taxpayers’ money.
Against this backdrop, the interim government’s Financial Institutions Division and Bangladesh Bank jointly drafted amendments to the banking law. However, the interim government left office without promulgating the draft as an ordinance.
Asked about the BNP government’s position on the Bank Company Act, the prime minister’s adviser on finance and planning, Rashed Al Mahmud Titumir, told Prothom Alo on 4 October that he believed the amended law would prioritise depositors’ interests while ensuring good governance across the banking sector.
Definition of family
Bangladesh Bank had proposed broadening the legal definition of “family” to prevent relatives from circumventing restrictions by presenting themselves as members of different categories of relationship. Ahsan H Mansur was governor at the time.
Under the existing law, family members include a person’s spouse, father, mother, son, daughter, brother, sister and anyone dependent on that person. During the interim government’s tenure, it was proposed that the definition also include sisters-in-law, brothers-in-law, fathers-in-law, mothers-in-law, a wife’s brothers and sisters (and a husband’s younger brothers and sisters), as well as dependants.
The BAB favours limiting the definition of family to spouses and dependants. By way of comparison, it has cited laws in other countries. In India, the term covers a spouse or a Hindu undivided family. In Pakistan, it includes spouses, dependent lineal descendants and dependent siblings. In Sri Lanka, it refers only to a spouse or dependent children.
In 1996, a banking reform committee led by Professor Wahiduddin Mahmud recommended that multiple members of the same family should not be allowed to sit on a bank’s board simultaneously.
Former Bangladesh Bank governor Ahsan H Mansur told Prothom Alo by phone on Wednesday night that the draft had been prepared in line with international practices, with a focus on good governance. It included measures to reduce family control over bank boards, increase the number of independent directors and shorten directors’ tenures.
“It is disappointing that the government is moving away from that position. It is the same old wine in a new bottle,” he said.
“Directors tend to think of a bank as ‘my bank’ or ‘our family’s bank’. I believe it is the government’s responsibility to use legislation to move directors away from this unhealthy mindset,” he added.
Greater leniency towards directors who default on loans
Under the current rules, a director whose own loan, or a loan they have guaranteed, becomes classified as defaulted has two months to regularise it. If they fail to do so within that period, they lose their position on the board. The law also allows their shares to be sold to recover the outstanding debt.
Bangladesh Bank’s draft had proposed even stricter provisions. Under the proposed rule, a director would also lose their position if a company in which they had an interest defaulted on a loan.
The decision has been made to drop this proposal from the new draft. It has also been decided to reduce the waiting period for someone who has lost a directorship to become eligible for appointment again, from one year to six months.
Powers of the central bank
Under Section 47 of the Bank Company Act, Bangladesh Bank can currently dissolve an entire board of directors if it finds evidence of activities contrary to the interests of depositors or the bank.
A provision was added to the draft stating that, after dissolving a board, the central bank could appoint an administrator or another suitable person to run the bank.
The new framework may allow an administrator to be appointed without dissolving the board. In other words, the regulator could intervene directly in a bank’s operations through an administrator when necessary, even while the board remains in place.
If implemented, this would increase Bangladesh Bank’s ability to intervene in management during a crisis, even if the owners’ representatives remain on the board. However, questions remain over whether irregularities can be eliminated while the board stays in place.
Existing law allows Bangladesh Bank to prohibit a bank from accepting new deposits if it is being operated in a manner contrary to depositors’ interests. The central bank may also prohibit such a bank from issuing loans. A new provision may extend this power to stopping the bank from providing new loans, investments or capital to its subsidiaries.
The draft amendments also state that directors of a borrowing company would not be allowed to resign, nor could they be dismissed, removed or released from their positions, without the bank’s approval. They would also be prohibited from transferring or selling shares without such approval.
Independent directors will not make up 50pc of the board
The draft ordinance amending the Bank Company Act proposed that a bank’s board comprise 15 members, half of whom would be independent directors. Banks currently have boards of up to 20 members, with three independent directors required under existing rules. The draft also proposed a provision barring cabinet members, MPs and local government representatives from serving on bank boards.
Opposing these proposals, the BAB argued that the number of independent directors could be increased to two or three. If independent directors made up half the board, it said, shareholders would lose control and compliance with rules would take precedence over profitability and growth in bank management.
After considering the views of different stakeholders, the Financial Institutions Division has settled on a maximum of three independent directors.
‘Risk of another banking crisis’
Asked for his assessment, former Bangladesh Bank chief economist Mustafa K Mujeri told Prothom Alo that much of the irregularity, corruption and looting in the banking sector had occurred through collusion among board members.
The proposal to limit directors’ consecutive tenure to six years was a sound one, he said. The proposal to restrict the number of directors from a single family to two was also important.
“Given the considerations behind the move to relax these restrictions, there is reason to fear that the banking sector could face another crisis,” he said.
Mustafa K Mujeri added: “The draft has not yet been finalised. I do not think even Finance Minister Amir Khosru Mahmud Chowdhury has fully reviewed what is being done. These issues will come before the Cabinet. I hope the government will reconsider them in the interests of the health of the banking sector.