The country’s central bank Bangladesh Bank (BB) is responsible for regulating and supervising the national banking sector. As has been standard practice for decades, the government had never issued written directives to BB regarding policy or regulatory decisions related to the banking sector in the past. But as the print media recently reported, the Ministry of Finance has started instructing BB on different issues during the current term of the current government. Apparently, the ministry interfered with decisions that fall within the jurisdiction of the BB, and some of this interference may have gone against the interests of depositors. The central bank’s legitimate authority is challenged and weakened in the process, and collateral damage to the sector may have increased.

Incorporated and operated as the country’s central bank under the Bangladesh Bank Order 1972, the Bangladesh Bank (BB) serves as the supervisory and regulatory authority for the country’s banking sector. Although the government exercised some control over BB under this order, this scope was removed by repealing section 9(1) in 2003. However, the order provides for a coordination council headed by the Minister of Finance which is supposed to coordinate revenue, monetary and exchange rate policies. Apart from this committee, the government has no other legal framework to control BB. Although commercial banks operate with money deposited by the public, depositors actually have no direct control over their deposits. Therefore, ensuring the safety and proper use of these deposits through regulatory means is the main function of the central bank.

Looking back, it can be seen that the Bangladesh Bank had taken many decisions over the previous decade regarding the approval of new banks, concessions to defaulting debtors, and the setting of deposit and lending rates in accordance with desire and advice from government leaders. However, most of these wishes and advice were conveyed either orally or in informal meetings. But surprisingly, even a written order was issued recently by the Ministry of Finance to grant special facilities to a particular group of companies. In addition, meetings were called and instructions were given to central bankers to facilitate the investment of additional money in the stock market through the banking channel.

The latest twist in this meddling saga was the decision by the Financial Institutions Division of the Ministry of Finance to sign an Annual Performance Agreement (APA) with Bangladesh Bank starting from 2022-23. Meanwhile, the relevant division has also sent letters to the Bangladesh Securities and Exchange Commission (BSEC) and the Insurance Development and Regulatory Authority (IRDA) to sign such agreements. Previously, the division had signed APPs with all public banks as well as with the Microcredit Regulatory Authority (MRA). But the relevant law clearly does not provide for the supervision of BB by any entity belonging to the executive branch. Like other countries’ central banks, the BB can only be held accountable to the legislator.

Experts have publicly claimed in the recent past that the Bangladesh Bank appears to have become a department under the Ministry of Finance despite its legal cover of autonomy in making and implementing policies, rules and regulations. Also, the relevant ministry is not expected to issue directives to the central bank in a free market economy. But many crucial decisions were taken in 2018-2019 regarding the reduction of interest rates and reserve rates thanks to the holding of a meeting with bankers by the minister concerned in a hotel in the city. This type of interference could not be imagined even until 2010. Central bank officials undoubtedly have enough knowledge, experience and expertise on the substance of banking policies. Therefore, they should be given full freedom and opportunity to make decisions. Otherwise, irreparable damage could be caused to the sector as well as collateral damage to the country’s economy.

According to the Bangladesh chapter of Transparency International (TIB), three handicaps exist globally in the supervisory and regulatory functions of the central bank. The first relates to the limits of its legal and political framework which restrict its independence, limit its regulatory role and provide the possibility of interference by companies and politicians. Political interference comes mainly from businessmen belonging to the ruling party. They initiate changes in laws, rules and policies that facilitate their influence and control over the banking industry. As mentioned above, the dual control of the sector by the Ministry of Finance also limits the independence of BB and creates obstacles to its operations. Invested coteries would influence banks using political connections, force BB to change policies according to their preferences, force central bank to change supervisory decisions, ignore rules and regulations and also create syndicates for lending by undermining BB’s independence. .

According to the Basel Committee on Banking Supervision, the relevant laws in Bangladesh often conflict with the fundamental principles of effective banking supervision that it has developed regarding independence, objectives, responsibilities, powers , etc. of the central bank. The Basel principle on the duties and objectives of the supervisory authority to establish a sound and safe framework for banks was only partially respected in Bangladesh. Similarly, the Basel principle on establishing a framework for supervisor independence and accountability has only been partially achieved due to the possibility of government interference. The principle of a clear and transparent process for the appointment and dismissal of the general manager of BB and the members of its board of directors is completely lacking in the absence of such legal provisions. Furthermore, the principle of giving the supervisory authority the power to impose sanctions has only been partially respected because BB cannot authorize the liquidation or merger of banks and the dismissal of administrators. Although it enjoys the right to enter any bank to ensure compliance with rules and regulations, and also has the power to set or change prudential standards, these are hampered by political and administrative interference, as well as the lack of appropriate applications.

Banking experts are indispensable for the governor, deputy governors and board members of Bangladesh Bank to be appointed by the Ministry of Finance. For this reason, they do not have the courage to ignore or challenge the Ministry’s decisions, as was evident in a recent meeting chaired by the Finance Secretary, where BB and BSEC were instructed to take measures in accordance with the recommendations of the meeting. As stated earlier, this type of interference in the operation of BB and BSEC has now become a norm. There are even allegations that the department hands over decisions to deputy governors after summoning them by breaching the chain of command, jeopardizing BB’s regulatory control over the banking industry. This can never bode well as it strikes at the very root of central bank autonomy and is bound to have a negative impact on the overall performance of the financial sector. It appears that real democratic governance and good political will at the highest level are necessary to rectify the situation.

Dr. Helal Uddin Ahmed is a retired supplementary secretary and former editor of the Bangladesh Quarterly.

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