The government is pondering to increase the number of banks in Bangladesh in such a time when the nine most recently-launched banks have already put the market in jeopardy for their damn poor performances. Despite this, the government believes more banks can boost the economy even though the economy already has 57 scheduled commercial banks in the country.
Hon'ble finance minister said. “There is nothing to be worried about with launching new banks. “New banks can help many unbanked people in the country. We have also taken steps to update the merger laws so that the incompetent banks in market can be merged”. But in fact too many banks for an small economy is a matter to be worried about. After all it's all depositors' money.
However, such announcement drew attention of ex-governor, economists, bankers and researchers. Former Bangladesh Bank governor Dr. Salehuddin Ahmed was one of them to oppose the finance minister’s views. He told, “It is quite illogical to give license to new banks. The existing banks are more than enough compared to the size of the Bangladesh economy”. Former deputy governor of Bangladesh Bank, Khondkar Ibrahim Khaled, added: “ Few years back, some banks got licenses under political considerations. These banks except one or two have already been transformed into "mudi dokan" (grocery stores) because of all the interferences by their directors, friends and family members”. Here lies the fact that ownership affect the performance of banks. The objectives, interests and priorities of the large shareholders results in a different impact on bank performance. Research by V. O. Ongore (2011), states that the value of a firm depends on the internal shareholder‘s shares or type of ownership structure, while it also finds that the identity of large owners has significant effects to bank performance. Similarly, some other papers find that the type of ownership structure determines firm performance.
However, a BIBM survey-2017, revealed that 95% of bankers thought no new banks were required in the present context. Some of them also said there were more than enough banks in the country, and it would be more wise to reduce the number of banks. Bangladesh Bank conducted a study in 2011 to assess the need for new banks in the country. The study found that the number of banks was too many compared to the size of the Bangladesh economy. Despite this finding, the central bank has since approved nine new banks under pressure from the government. All of the investors of the new banks are politically exposed persons.
To survive in a dry market, all nine commercial banks were in aggressive expansion mode, putting their depositors’ money at risk, a recent BIBM study shows.
Their non-performing loans (NPL) rose alarmingly over the last two years due to irregularities.
After all these have happened, Bengal Group , whose chairman is ruling party MP Morshed Alam ,has applied for license for opening a new bank named Bangla Bank.
In addition, a businessman from Chittagong named MA Kashem has also applied to open a shariah based bank named People’s Islami Bank. Now comes the questions" what to do" .
Practically, the size and nature of economy, population, education, income are the major parameters of determining number of banks an economy can have to serve its people. Bangladesh, an economy of around USD 250 billion, has now been shared with 57 scheduled banks. These 57 banks are more than enough to serve the economy. In order to buttress a growing economy, number of banks may be increased keeping alignment with the positive changes in GDP. Though GDP growth has been on increasing trajectory, it does no way mean new banks are needed because it has not exceeded 2%. Sherman and Scott L. Fulford (2003) "Banks and Economic Growth: South East Asia Review" mentioned that if a free market economy relative to its size, population and income with more than 2% GDP growth may require more financial intermediation.
But it cannot be clearly indicated how many banks can be put in the play to cater the growing needs or to provide banking services to unbanked people in an economy. That job lies on central bank. One fine way to serve the unbanked people is to increase the number of branches where necessary. But adding new players to game will certainly spoil it. as it goes, more banks than needed in an economy will have spillover effects on macroeconomics variables causing negative externalities such as depositors' confidence loss in banks (bank run),unhealthy competition, increased NPLs and irregularities capital flight and financial instability.
Provash Kumer Sarker, Deputy Director
Bangladesh Bank I Central Bank of Bangladesh
Head Office, Dhaka-1000