Counting Our Blessings | Anis A. Khan, former Chairman of the Association of Bankers, Bangladesh Limited (ABB)

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Anis A. Khan, former Chairman of the Association of Bankers, Bangladesh Limited (ABB) and former Managing Director & CEO, Mutual Trust Bank Limited (MTB) talks about the growth of the country’s banking sector, the potential of mergers and the promise of digital banking. Amongst other pursuits, he now teaches Banking and Finance at a leading private university and is the Senior Vice President of the Metropolitan Chamber of Commerce & Industry, Dhaka (MCCI).
What has been the most adverse effect of the pandemic on the country’s banking sector?

I would like to say the most adverse effect of the pandemic on the country’s banking sector is still to come. It’s not yet here. The banking sector for now has weathered the effects of the pandemic quite well. They have managed to stay afloat and serve the people of the country, and, alongside, they have enhanced their digital banking capabilities. The pandemic came as a blessing in disguise for banks to upgrade, upscale, reinforce, and rejuvenate their digital banking platforms. Banks have been instrumental in dispersing the stimulus packages announced by the Honorable Prime Minister. They have also restructured a lot of loans which were going bad.

Now we come to the future – customers have been greatly affected. Hotels have closed, restaurants have incurred losses, many of the entertainment parks are closed. The transportation sector was hit because of the lockdown bringing a stop to the movement of airplanes, trains, buses, and even taxi services, micro-bus services and CNG run auto-rickshaws. Rickshaws were affected a bit less. If we analyze all these, we can clearly see that the country’s overall business sector and industries have been greatly affected. Retail clothing business has been affected because people cannot go out to shop due to repeated lock-downs and curbs on movements outside of their homes.

In the future, customers whose loans have been restructured and rescheduled, will have to start realizing that they have to pay back the banks their dues. At that time, some of them will not be able to pay, and, as a sequel, the country’s Non Performing Loan ratio will go up triggered by the adverse effects ultimately resulting from the pandemic. Secondly, the banks will have to make higher provisions, which will mean erosion of their profitability. Thirdly, they will face challenges to function effectively and carry out normal expansion and diversification activities. This means that there will be less employment opportunities for the country’s young population graduating from the colleges and universities. All these effects will likely come in the future and the sector has to prepare accordingly.

The difference between the lending rates and the deposit rates, widened over the last several months – what is the objective behind this widening and how will the inflation rate of 5.64 percent affect depositors going forward?

I have been a witness to this endeavour ushered in by the Honorable Prime Minister and also the Minister for Finance at that time, Mr. Abul Maal Abdul Muhit, followed by his successor Mr. A.H.M. Mustafa Kamal, FCA, MP. They wanted to see single digit interest figures in the country’s banking sector, which I have wholeheartedly supported over the years. In Scandinavian countries, banks deduct money from customer accounts for maintaining them – there is no interest paid. In The Netherlands, if you put your money in the bank, the bank will give you only 0.02% to 0.60% per year. In those countries you can also take home loans for an interest of 6-7%.

Large companies depending on their commercial strength, can borrow at an interest rate range of 4%-5%. In those countries, the general populace including those who have retired invest in the stock market, in derivative products and hedge funds. Secondly, the governments in those countries have state pension funds and old age benefits for someone of my age. Here, in the private sector, there is no pension or any other retirement scheme. I get zero benefits, and instead my taxation is still nearly 30%. After I retired, I put my benefit receipts in the bank for an interest of 9%-10%, which has now come down to half, that is 4-5% in a country with no private pension fund. While I support single digit interest rates, I also advocate for the introduction of pension schemes for the private sector employees.

It is very good for the country’s industry to drop interest rates from 15-16% on car loans to 9%, home loans from 15-16% to 8-9%, industrial commercial loans to 7-8% from 14%-15%. Unfortunately, the private sector credit growth has dropped in this pandemic situation from 14.5%, to to 8.5%. The banks are sitting on piles of idle cash, that is excess liquidity. People are not spending money, instead those who can are saving and putting it in the banks. Banks are unable to disburse funds because there is no substantial private sector investment. It is a conundrum which will work itself out once the pandemic lifts, the investment activity increases and the country’s economic activity increases, and at that time, the deposit rate will automatically come up through economic forces of demand and supply.

Banks maintained a capital adequacy ratio (CAR) of 11.60 percent last year, way less than 18.6 percent in Pakistan, 16.5 percent in Sri Lanka, and 15.8 percent in India indicating a poor financial health. How can this be improved?

It is extremely important for a bank’s capital to be as high as possible. Historically, when banks made a profit they gave a lot of it away in the form of cash dividend. It should have been a policy to give 50% cash and 50% stock dividend. Every year, the banks can increase their capital base by giving stock dividends. As a bank’s balance-sheet size increases, it needs to add fresh capital and/or opt for rights share issues where possible. Shareholders are now unable to put in additional capital required, as the base has progressively gone up over the years. It is difficult for the original shareholders to economically and financially pay so much money to add to the paid-up capital through rights share issues. Therefore, companies need infusion of capital from external sources and they have to be careful where they get it from.

I worked with a number of sources for injecting fresh capital into Mutual Trust Bank Limited (MTB) over a period of many years, and finally, we got Norfund – The Norwegian Investment Fund for Developing Countries, owned and funded by the Norwegian Government, to acquire 10% additional capital along with payment of a premium amount. MTB share capital went up considerably because of this infusion of capital. Other banks will also have to work on this issue to improve their balance sheet strength and their financial health and go to various investors and request them to put in money to increase capital.

Against the backdrop of falling trend in non-performing loans (NPLs) , what kind of challenges do proper monitoring of regular loans along with rescheduled loans amid the Covid-19 pandemic pose for the banking industry? Can you elaborate on the kind of policy support the banking sector has extended to customers, lenders and business in this ongoing pandemic?

Non-performing loans have dropped in the banking sector. However, the drop is more so because of the restructuring and rescheduling of classified loans allowed under the Bangladesh Bank circulars, issued to give relief to the business houses in the rise of losses suffered by them due to the effects of the raging pandemic. These measures allow customers to remain regular so they can continue to borrow to run their businesses and pay salaries, utility bills and have some sort of production of goods and services ongoing. At this moment, because of these foregoing measures, banks have stable balance-sheets and are thus able to support the businesses to meet their urgent and emerging needs.

As the loans are mostly regular, banks are also deriving a good income and making a profit, which means they are not eating into depositors’ money. They have to protect the money deposited by their customers first. Banks are one of the largest taxpayers of the country, contributing to a sizable portion of the nation’s annual budgetary needs. Now that the loans are rescheduled, they are making profits and announcing dividends and paying taxes, in that way it is healthy.

The Bangladesh stock market holds opportunities for investors looking for diversification – how can this be leveraged to encourage Foreign Direct Investment?

Our stock market has always been very shallow. First of all, not enough Bangladeshi companies are listed on the stock exchanges. There are many enterprises in Bangladesh which can float their shares on the stock market and share the fruits of their hard work with the general public, which contributes to better economic development of the people and the country. When you float your company, investment multiplies and you are able to get back a part from the stock market, and an investor can then expand into a new enterprise. This is how the economy grows through the stock market. You share the wealth along with the people and also it becomes a source of funds.

I am privileged to be an independent director of a number of public limited companies. It is my responsibility to ask the companies relevant questions, ensure they hold board meetings regularly and adhere to all laws and regulations. Therefore, people who have experience in government and public administration, teaching, banking, etc., are able to contribute to better corporate governance, transparency and better scrutiny through performing these roles and responsibilities.

Our stock market potential and capacity is greatly underutilized, so many more companies need to come forward and float their shares. Meanwhile, Central Depository Bangladesh Limited (CDBL) was set up in August 2000 by the country’s Government Owned Banks, Investment Corporation of Bangladesh (ICB), Private Commercial Banks (PCBs), Foreign Banks, Merchant Banks, Publicly listed Companies, Insurance Companies and Dhaka & Chittagong Stock Exchanges with the collaboration of the Asian Development Bank (ADB). CDBL’s core services cover the efficient delivery, settlement and transfer of securities through computerized book entry system, i.e., recording and maintaining securities accounts and registering transfer of securities; changing the ownership without any physical movement or endorsement of certificates and execution of transfer instruments.

The Central Depository System (CDS) operated by CDBL has proved to be a convenient and reliable means to settle securities transactions. The investor has been freed from the hassles of physical handling of certificates, errors in paperwork and the risks associated with damaged, lost and forged certificates.

Following from this successful venture, and as part of the continuous modernization and increment in capacity of the capital market in Bangladesh, the market authority and relevant stakeholders took different initiatives such as modernization and demutualisation of stock exchanges and a raft of other such measures. The Bangladesh Securities and Exchange Commission has promulgated the Clearing & Settlement Rules, 2017 to form a Central Counterparty (CCP) in Bangladesh. Under the said rules, a company has already been incorporated in the name and style of Central Counterparty Bangladesh Limited (CCBL) in January 2019. The shareholding of the company is held by Dhaka Stock Exchange Limited (DSE), Chittagong Stock Exchange Limited (CSE), Central Depository Bangladesh Limited (CDBL), local banks and a strategic investor (to be introduced).

CCBL is planning to implement a state-of-the-art CCP System to manage the ever-growing business of the Bangladesh capital market and align its business vision with technological advancement. The company has now taken initiatives to search for a new, robust, high frequency CCP System with multi asset-class and multi exchange transaction Risk Management, Clearing & Settlement facilities along with integration of different entities like stock exchanges, depositories, clearing members and banks for smooth handshaking with the third party applications through Industry Standard and customized API.

Our stock market is a hidden gem. It needs to have better corporate governance standards, educated and trained merchant bankers, traders, security brokers, and more experienced people in the Bangladesh Securities and Exchange Commission (BSEC). We are now fortunate in having a visionary and outstanding BSEC Chairman who understands the capital market very deeply, and he is guiding and shaping for better days with great dexterity. He is supportive of the private sector, so I am hopeful that if more structural reforms are ushered in, they will have a positive impact on our bourses and country’s economy.

How can Islamic banking improve the overall financial health of the banking sector, and what kind of policy support can the government extend in regards to this?

Islamic Banking started in a small way in Egypt in 1963. Later on, the Islamic Development Bank formalized the definition. In March 1983, Islamic Banking started its journey in Bangladesh with the setting up of Islami Bank Bangladesh Limited (IBBL), and, today, it is a great success story. Bangladesh’s population is predominantly Muslim. Secondly, people are generally religious and thirdly, people are becoming more religiously inclined. It is the shift in the mentality of the general population which is making Islamic Banking flourish.

And, basically, Islamic Banking as it is being practised in Bangladesh today offers its products and services akin to the conventional banks with similar looking branches and offices. However, the accounting treatment is different and they need to be as much Shariah compliant as possible. In December 2020, the first Islamic bond came out, and we need more of these products to tap into the surplus funds held by the Islami banking system in the country.

For conventional banks, the Statutory Liquidity (SLR) ratio is set at 13.0%, which is much higher than the Islami banks who have to keep only 5.5% of their deposits as SLR. I think Islamic Treasury products need to be launched in a much bigger way so that the SLR ratio can be brought to par for all banks and a stronger reserve situation emerges in our banking system making it increasingly stable.

Is the banking sector an overheated market? Do we actually need this many banks?

In 2000, Standard Chartered Bank (SCB) acquired ANZ Grindlays Bank branches right from the Middle East and up to Bangladesh. Coincidentally, under the leadership of Mr. Muhammad A. (Rumee) Ali, the joint CEO of the two banks Standard Chartered and Grindlays, I was appointed as the Country Integration Manager, along with consultants from abroad and SCB senior resources. It was an exciting experience for me to undertake this challenging role and learn new things. To cut the long story short, look at Standard Chartered Bank now – it is now one of the most powerful banks in the country, generating one of the best profits.

nother bank I want to give as an example is that of Bank Asia. Born in 1999, the same year as Mutual Trust Bank, they are nearly double the size of MTB due to acquiring the Bank of Nova Scotia, Societe General – a French bank, and then, lastly, Muslim Commercial Bank when these banks left Bangladesh. Bank Asia’s capital base and deposit-asset ratio has now become stronger and it is doing great. I am an ardent supporter of mergers and acquisitions. Mergers and acquisitions improve a bank’s health by making it stronger and stable and brings in economies of scale.

50 years on, besides agent banking what else can we expect from this sector? How about the rise of digital banks?

This is one of my favorite subjects. MTB introduced agent banking when I was its CEO and by now the bank has 185 agent banking centers. 50% of Bangladesh is unbanked and agent banking centers can help reduce this gap to 25%. I recall a young lady in Savar with a Masters degree in Economics who taught at a school and ran an agent banking center there giving her autonomy and independence. Seeing her mother-in-law supporting her made me feel so proud and happy, when I went to their home for a humble lunch after the inauguration of the agent banking centre in their village.

Agent banking centers empower people in villages and help make them aware of banking services and products. In the future, these agent banking centers have the potential of becoming a small sub-branch.

COVID-19 has bolstered the proliferation of digital banking across the world. The future will see a rise in digital banks as future generations get more educated, become digitally literate, the internet becomes affordable and more smart devices become available. By 2030, I envision digital banking to have substantially taken the place of traditional brick and mortar banks.
The banking sector in Bangladesh is well developed and banks are getting increasingly sophisticated with the products, services and branches striving to be at par with banks of the world.

Plus, they have been able to employ so many of our graduates, who eventually provide for their families and act as an economic multiplier for our fast developing country. The banking sector’s development has been a boon to the country’s economy, and helped the growth of the country bringing in sustainable development and financial inclusion.

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