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Bangladesh Bank: which way now? (Author: Muhammad A (Rumee) Ali)
Posting Date:2011-04-21

It does seem like the Bangladesh Bank has painted itself into a corner. That is what the perception is. With the inflation elbowing in, yet there is pressure to hold interest rates down, the IMF holding back disbursement and the FBCCI demanding a cap on lending interest rates. The small investors think that the Bangladesh Bank and the Securities and Exchange Commission are responsible for the stockmarket crash in an unholy alliance with the corporate culprits and the bankers believe the central bank is holding back and creating the liquidity pressure in the market. Some bankers feel the central bank is more interested in dabbling in 'esoteric banking' and has touch with the real world. The Grameen Bank fiasco has also cast the bank in a 'controversial' role in the global media.

In the back of my mind I felt, my involvement with the Bangladesh Bank could prejudice my objectivity. Now, four years later, I hope I will pass the test.

We saw the Bangladesh Bank come out with a new strategic direction, unknown to the usually conservative world of central and mainstream bankers all over the world. Steeped in the tradition of 'Breton Woods', central bankers find it very difficult to rationalise anything that does not fit this paradigm. Anything else is 'beyond the pale' and is met with more than healthy dose of scepticism. Thus the courageous steps into the uncharted waters the bank had taken, to promote inclusivity by bringing the people in the 'bottom of the pyramid' into the banking system, focus on the agriculture sector in innovative ways, to get the banks and financial institutions to see that there is bankable business in the small and medium sector and making it worthwhile for them to invest in the 'green enterprises' appeared to traditionalists, at best 'populist' and at worst 'frivolous'. To me, it seemed that the central bank was trying to reach out that segment of the population who we mainstream bankers do not concern our self with and even if we do, 'it's CSR' not really 'business as usual'. Although all this sound very important objectives, it does not fit the traditional paradigm of the Breton Woods model of a central bank. It is, therefore, not surprising that many of us were left wondering and questioning; is it not, that this all be best left to the government? In the recent past we have seen that this widely accepted model of a central bank is not without its vulnerabilities. We saw the greatest proponents of free market intervene aggressively to save mega financial institutions from liquidation. The reason was to save the financial system that was near collapse and thus in effect 'rebooting' a system that had 'crashed'. In fact, globally there is a growing discourse on 'what are the alternatives?' The Bangladesh Bank's new strategic direction must be under a microscope and many all over the world are observing with keen interest. The only word of caution must be to ensure these are in sync with the monetary policy objectives and risks that banks and financial institutions will encounter, are managed. The Bangladesh Bank should undertake risk based impact studies and ensure that the banks and financial institutions put in place systems and processes and has a robust governance to manage these risks effectively. There can be nothing wrong in choosing growth through inclusivity, in fact one might argue; it is not just economic growth that a society should strive for but inclusive growth, a growth which reduces inequalities in a society and help create a cleaner environment.

While breaking new grounds are commendable objectives, it is equally important for a central bank to keep the eyes on the ball on the basics and the basics for any central bank must be monetary policy and the supervision of the financial industry. A robust strategic approach was not evident in these two core roles. A more tactical and reactive way appeared to be the chosen path the central bank had taken. Take the step to cap lending rates. A supply side move without any measures to stem demand created the inevitable credit growth and must have added to the inflationary pressure. This was followed by reducing liquidity in the market and lately, by withdrawing the 'lending rate cap'. The central bank certainly needs to intervene in situations that it thinks proper, but in doing so it must consider the consequences that may follow and be in a position to manage it. The IMF insistence on removing the cap was inevitable and could have been pre-empted by the bank removing the lending rate cap on its own. There cannot be any glory in being forced by the IMF into reversing a policy. Now we have a situation with the business leaders demanding a return to the 'lending rate cap', the bankers insisting that in that case there should be a 'deposit rate cap' (nothing can be a more retrograde step) and IMF's stand 'neither' if we want the one billion dollars on offer.

And then we have the stockmarket crash and the Bangladesh Bank suddenly discovers that they are a participant in the blame game. Where did the bank go wrong? The Ibrahim Khaled Report says it all. This is perhaps a weakness of our supervisory regime. First, the limit of exposure to investment in the stockmarket had to be linked to owners equity not depositors money. Secondly, the financial sector needed guidelines, for both the banks and the non-bank financial institutions, on market risk management detailed and clearly outlining the systems and processes and the governance structure that banks must follow to manage their foray into the often risky world of stockmarket. The banks in stockmarket can play the role of a longer term investor and it is this role that could have been encouraged in the guidelines too. It is also important to ensure that promulgation of guidelines is done in conjunction with building supervisory capacity in the inspection area in both systems and transactional audits. It was no secret that both the banks and financial institutions were moving into the stockmarket aggressively and given the regulatory and supervisory weakness of the SEC and the opportunistic market players, the crash was inevitable. Even the dire warning of many (including the SEC) was ignored by all.

The Bangladesh Bank has to be credited in what has been achieved by the financial industry and its role in developing the real sector of the economy. The overall stability of the financial sector has been an important factor in Bangladesh achieving a favourable rating from the international rating agencies. Bangladesh now is being keenly watched by global investors as one of the 'next eleven' emerging economies. The strategic direction that the Bangladesh Bank has outlined for itself, given the national and global context, should be supported, particularly the 'inclusivity' and 'environmental' objectives are concerned. What is also needed is a clearer and a more proactive approach in the core functions of the central bank. Indeed it was Bangladesh that gave the world microfinance and is now leading the world in developing social enterprise and social entrepreneurship. Given the critical role a central bank plays in an emerging economy the Bangladesh Bank must not shy away from the chosen objectives by the 'nay sayers'.

The writer is the chairman of BRAC Bank and former deputy governor of Bangladesh Bank.

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