Relief for errant bank owners?

Reforms to curb family control being rolled back

Bank owners look set to win back the control the interim government tried to take from them. The new government is rewriting the Bank Company Act, and the version taking shape would undo some of the tighter rules meant to stop families from running banks as private fiefdoms.

Two changes stand out. Bangladesh Bank, under the then governor Ahsan H Mansur, had proposed cutting family seats on a bank board from three to two; that ceiling is now going back to three. Its proposed six-year cap on directorships, meanwhile, will be stretched to nine.

That should worry anyone with money in a bank, and anyone who pays taxes. The last time the rules bent this far towards the owners was in 2023, under the Awami League government, and the episode is worth revisiting.

It was a chaotic Wednesday. Bangladesh’s parliament had descended into uproar, with opposition lawmakers shouting, throwing their hands in the air and finally walking out. The trigger was a last-minute amendment to the Bank Company (Amendment) Bill 2023, slipped in by Awami League MP Ahsanul Islam and pushed through by then finance minister AHM Mustafa Kamal.

The change was startling: bank directors could now serve twelve consecutive years, up from nine. As the then parliament speaker, Shirin Sharmin Chaudhury, cut the opposition’s microphones and shut down debate, Jatiya Party lawmaker Kazi Feroz Rashid reached for satire. Had the government simply granted bank owners a lifetime appointment, he asked, adding that whenever these directors caught a cold, they flew to Singapore on depositors’ money. His party colleague Mujibul Haque was blunter still. He called bank directors the “masterminds of bank looting” and warned that the state had handed its authority to private financial barons who even decided who became central bank governor.

Theatrics aside, that session marked something serious: oligarchic capture written into law. The rot, however, long predated the 2023 amendment. For years, conglomerates had treated commercial banks as personal balance sheets, seeding boards with spouses, children and extended relatives and draining assets along the way. Insider lending and bad loans hollowed out bank after bank, until some could no longer serve ordinary customers. Depositors showed up at the counter and were turned away.

The numbers show how deeply the system was compromised. Directors of eight private banks borrowed heavily from one another through reciprocal lending. By the end of 2023, loans involving the directors of the eight banks totalled Tk 25,000 crore, according to financial reports analysed by The Daily Star. Four of those banks also lent around Tk 20,000 crore to relatives of their chairmen or directors.

Tenure also matters because a board is supposed to be the bank’s conscience, the place where management is questioned, and risky loans are challenged. Keep the same directors in place for too long, and that scrutiny fades: loans to friendly companies get waved through, and warning signs get filed away.

THE INTERIM FIX

When an interim government took over after the 2024 political upheaval, the central bank set out to break that cycle. The first job was firefighting. To stop the rot from spreading, the authorities merged five failing private lenders into a new entity, Sammilito Islami Bank, backed by a Tk 20,000 crore capital injection from the national budget. The bill for a crisis cooked up in private boardrooms landed, as usual, on taxpayers.

The second job was finding out how deep the hole went. Asset quality reviews dragged bad loans out of the shadows, and the numbers were sobering. According to a September 15 report by Moody’s Ratings, non-performing loans across the system now stand at around 32.8 percent. In other words, roughly one taka in every three lent out by Bangladeshi banks is not being repaid as promised.

The third job was prevention, and here the interim reforms showed real ambition. Bangladesh Bank drafted an overhaul of the Bank Company Act modelled on international corporate governance standards and aimed squarely at the machinery of board collusion. At its heart was a plan to curb family control: the number of relatives allowed on a board would be reduced from three to two, and the consecutive tenure cap would drop from twelve years to six.

The interim administration then went after the make-up of boards themselves. Independent directors would fill half the seats on a slimmed-down board of 15, putting people with no stake in the owners’ other businesses in a position to ask tough questions. That is the difference between independence as decoration and independence as a genuine safeguard.

To stop families from simply shuffling seats to relatives, the interim draft also broadened the legal definition of “family” to cover in-laws, brothers-in-law and mothers-in-law. That added teeth to the rules. Under a cross-default rule, a director would lose their seat if any company linked to them defaulted on a loan, and only full repayment, not rescheduling, would win it back.

THE RETREAT

Now the Bangladesh Association of Banks, the influential lobby of bank owners, has pushed for a reversal. Its arguments are familiar. Capping family directorships would upset established ownership structures. Shorter tenures would strip boards of hard-won experience. And handing half the board to independent directors would cost shareholders control, trading growth and profitability for box-ticking compliance. The Financial Institutions Division appears to have been largely persuaded, as minutes of a September 20 meeting on the reforms suggest.

The owners’ concern about control is understandable, but a bank is not an ordinary company. It runs largely on other people’s money, and its shareholders’ stake is typically a small fraction of the deposits it holds. That is precisely why regulators everywhere set limits on owners.

The timing could hardly be worse. Moody’s Ratings estimates that bringing banks back up to the required capital adequacy level will cost around 10 percent of GDP, spread over several years. Earlier this month, Bangladesh Bank Governor Mostaqur Rahman put a number on the pain: the banking sector will need Tk 60,000 crore a year from the national budget for the next five to eight years. For a government with very little fiscal room, that is a heavy load, and it comes with a hidden sting. The state is leaning more and more on domestic banks to finance itself, and every taka it borrows from them is a taka not lent to private businesses. Bad governance at the top of a few banks ends up squeezing credit for the entire economy.

There is one bright spot in the Moody’s assessment. Liquidity has held up, with deposits across the system growing. Savers, it seems, have not given up on the banking system. The sector’s troubles lie mainly in the solvency of some lenders rather than in overall liquidity, which is another way of saying the problem sits in the loan book, not in a shortage of cash. And loan books are shaped in the boardroom.

There is also a question of credibility. Investors and foreign lenders, including the International Monetary Fund and the World Bank, all watch how Bangladesh handles moments like this one. A reform announced with fanfare and then hollowed out sends all of them the wrong message.

Cosmetic fixes will not do, and retreating from deep reform is a gamble Bangladesh can ill afford.