Bangladesh's banking sector is heading towards consolidation, with 20 to 25 stronger banks potentially emerging as the main financiers of the economy over the next five to seven years, as weaker institutions struggle with bad loans, capital shortages and declining depositor confidence.
The crisis has exposed the consequences of issuing bank licences for political considerations and allowing influential sponsors to interfere in lending decisions. Restoring confidence will require stronger corporate governance, professional boards and an end to political interference.
In an interview with The Business Standard on the occasion of Mutual Trust Bank's (MTB) 27th anniversary, Managing Director and CEO Syed Mahbubur Rahman discusses the future of the banking industry, regulatory oversight, lending quality and the challenges facing profitability.
Rahman, who has spent seven years at MTB and more than 37 years in banking, says the bank has strengthened its credit assessment process, keeping the non-performing loan (NPL) ratio of loans disbursed during the past six years at around 1%. MTB's overall NPL ratio is approximately 6%.
He also outlines plans to raise Tk342 crore in Tier-I capital, potentially through a strategic investor who could strengthen both the bank's capital base and corporate governance.
TBS: Despite the banking sector's prolonged crisis, some banks have remained relatively strong. What explains their success?
Syed Mahbubur Rahman: It comes down to corporate governance. If the leadership at the top is sound, an institution can function properly.
The boards of relatively successful banks have continued to perform their responsibilities, resisted interference and held management accountable. They have focused on protecting the fundamentals of banking rather than pursuing short-term profits or dividends.
Eastern Bank, Prime Bank, BRAC Bank, City Bank and Uttara Bank are examples of institutions that have performed relatively well. The main reason is that they have kept political influence out of their operations.
The most important thing for the future is to stop political interference in banking.
The late finance minister Abul Maal Abdul Muhith warned that excessive bank licences could turn banks into little more than grocery shops. With many banks struggling and 22 reportedly operating at a loss, has that warning proved correct?
Bank licences were issued for political considerations, and we can see the consequences today.
Bangladesh has more than 60 banks, but I would say no more than 15 to 20 are performing well. The others continue to operate, but their ability to fulfil their basic functions varies considerably. Having too many banks is one of the major reasons for the industry's current condition.
A bank is fundamentally different from a manufacturing company because it deals with public money. When a bank accepts deposits, it assumes an obligation to return that money. It cannot treat depositors' funds as its own.
The biggest issue in a troubled bank is confidence. If customers believe they may not get their money back, they will withdraw deposits or avoid depositing money in the first place.
A bank may continue to provide routine services even when its NPL ratio is extremely high. Customers may judge it by their daily experience, but its underlying financial condition could be deteriorating.
Being able to return deposits today does not necessarily mean a bank is financially sustainable. If banks lose their ability to honour obligations, the consequences will extend beyond individual institutions and threaten confidence in the entire banking system.
Is Bangladesh heading towards consolidation, with fewer, stronger banks eventually dominating the economy?
Consolidation is a natural process. Over the next five to seven years, we may see from 20 to 25 stronger banks emerge as major institutions. If the economy grows and the business environment improves, they could become much larger and play a more significant role in financing economic activity.
A country with an economy the size of Bangladesh's does not necessarily need so many banks, particularly when many cannot perform their basic functions properly.
Stronger banks will have opportunities to expand, increase capital and generate better profits. Some weaker banks may merge, some may close, while others may continue operating in distress.
The industry will change considerably over the next five to seven years. Ultimately, the economy will depend on institutions that can operate efficiently and provide the financial services businesses and households need.
What lessons should the government and Bangladesh Bank draw from the crisis? How should banking regulation change?
The government and Bangladesh Bank should avoid micromanaging individual banks. Their responsibility is to establish clear rules and ensure compliance.
The regulator should set capital requirements, lending limits, board-composition standards and fit-and-proper criteria for shareholders and management. But it should not interfere in every operational decision.
Consider the key performance indicators introduced for managing directors. A board approves a business plan and assigns responsibilities to the MD. If the MD delivers the agreed results while maintaining the bank's financial health, the board should be able to evaluate that performance.
The regulator should focus on overall safety, soundness and compliance rather than managing every detail.
However, some bank boards are themselves weak. We need independent directors who have the expertise and independence to challenge sponsors and management. Personal or business relationships with sponsors can undermine their independence.
At MTB, board members can disagree with management, question proposals and refuse to approve them. Independent directors are expected to exercise their own judgement. This is the kind of professional board governance the industry needs.
Attracting qualified directors can be difficult when remuneration is inadequate. Serving on a bank board involves considerable responsibility and professional risk. Directors must review lengthy memoranda and assess complex loan proposals, often relying on management, risk officers and committees. Yet they may face scrutiny if an approved loan later becomes non-performing.
Fit-and-proper criteria must therefore be strengthened for both management and sponsors. Having money does not automatically qualify someone to run a bank.
Credit growth remains weak, while many banks rely on treasury bills and bonds for income. What are the biggest challenges to profitability?
The biggest challenge is maintaining net interest income. Banks need to earn sufficient income from their core lending and deposit-taking activities, but many are struggling.
Gas shortages are affecting factories, with some operating at only 30–50% of capacity. Under those conditions, businesses are unlikely to borrow more to expand production. That is one reason credit demand remains weak.
Much of Bangladesh's economic growth has depended on government spending, while private investment has remained relatively stagnant at around 21–22% of GDP. We need consistent economic policies and energy security to encourage private investment.
Some banks have become heavily dependent on government securities. Treasury bill and bond yields have been attractive, but returns are declining as interest rates fall. We cannot know how long banks will be able to rely on this income source.
We must also question whether past credit growth reflected productive economic activity. Some of the lending was diverted or siphoned out rather than invested in businesses.
Consider First Security Islami Bank, whose NPL ratio has reportedly reached around 90%. Its loan portfolio amounts to tens of thousands of crores of taka. Where did that money go?
If loans were diverted, they did not generate the expected economic activity in Bangladesh. Higher credit growth should not automatically be interpreted as economic progress. We must establish whether money reached productive businesses or was diverted elsewhere.
You have spent seven years at MTB and more than 37 years in banking. What achievements are you most proud of, and what has distinguished MTB over the past five years?
I believe MTB is one of the best-governed banks. Our chairman and directors generally attend scheduled board meetings or specific meetings where their presence is required, rather than visiting the bank unnecessarily.
One of our biggest achievements is the quality of lending. The NPL ratio for loans disbursed during the past six years has been around 1%, although the bank's overall NPL ratio is approximately 6%.
We have strengthened credit assessment by carefully identifying customers, evaluating their businesses, assessing market conditions and monitoring risks.
Digital banking is another area where I believe MTB is among the frontrunners. We have expanded retail banking and introduced new products. In credit cards, for example, we were previously ranked seventh, eighth or ninth in the market; we are now the third-largest player.
We have also improved centralisation, internal processes and governance. Our board has played an important role in this transformation.
We are working to strengthen our brand and make the bank more attractive to younger customers by projecting a dynamic, forward-looking identity.
What is MTB's vision for the next five years, and how do you plan to strengthen its capital base?
We want to become the most responsible bank, serving customers across all segments. Our board is strongly committed to building a responsible and respected institution.
At the same time, we want to strengthen our capital base because a bank's strength ultimately depends on its capital.
We have started working to raise Tk342 crore in Tier-I capital and have also applied for a Tk500 crore bond. We are exploring different options, including bringing in a strategic investor.
We want to attract an investor who can strengthen both our capital base and corporate governance. We are particularly interested in foreign investment because we currently have no foreign direct investment in the bank.
We are considering both domestic and foreign investors and have not yet decided whether to pursue another public offering or bring in a strategic investor.
Strengthening our capital base is essential. It will improve the bank's financial strength and help us accelerate the process of cleaning up our balance sheet.