Bangladesh’s banking sector has become fully oriented towards financing the government because of the state’s large revenue deficit and a weak tax-to-GDP ratio, National Professor Dr Mahbub Ullah said, warning that private sector credit is being crowded out.

Speaking at the opening session of the second day of the 11th Annual Banking Conference at the Bangladesh Institute of Bank Management in Mirpur, Dhaka, Ullah said the government’s heavy monthly borrowing was squeezing credit available to the private sector. The two-day conference, on reconstruction of the banking sector to accelerate economic growth, has Bonik Barta as its media partner.

Dr Ullah said public confidence in the banking sector had fallen to near zero. He noted, however, that some good banks and honest people remained in the sector, and could serve as examples in determining what the banking sector needed to do.

He said the government’s regular borrowing and uncertainty over future interest and instalment payments were major warning signs for the economy.

The national professor described the sector’s distressed state and the prevalence of non-performing loans as symptoms of a broader systemic disease affecting Bangladesh’s administration, business, education and health system.

He said the country’s state character and politics were being used to serve the interests of a small group of influential, wealthy oligarchs. He described Bangladesh as an “extractive” state, saying those in power had treated it as their personal property or empire and distributed undue benefits and favours to relatives and close associates. Unless the extractive state was transformed into one oriented towards the welfare of ordinary people, no sector could achieve lasting improvement, he said.

The economist warned that repeated mass uprisings and bloodshed had not produced meaningful social or cultural change, leaving people frustrated and impatient. An uprising alone was not a final solution; an ideological framework, a clear national rejuvenation programme and dedicated leadership were needed, he said.

He also said there was no quick fix to the crisis, which required time and strong political will. Economic reform must be accompanied by fundamental correction of the political system and an end to the unethical nexus involving bankers, dishonest businessmen and bad politicians, he said.

Dr Ullah added that the problem of loan defaults and banking distress had initially been viewed as a know-your-customer (KYC) issue but had later developed into a dangerous nexus involving bankers, dishonest businessmen and bad politicians.

Slogans of good governance would achieve nothing without adequate investment and institutional goodwill, he said, adding that removing deliberate irregularities and corruption, and bringing about the desired changes and better times, required society to show contempt for and distrust towards wrongdoers.

In a keynote paper, former Dhaka University economics professor Barkat-e-Khuda said the banking sector’s potential was being held back by non-performing loans, weak governance, capital shortfalls, liquidity crisis, money laundering and low productivity among bankers. Political influence, flexible policies, repeated loan restructuring and slow private sector credit growth had fuelled abnormally high NPLs.

Khuda said family control of bank boards and a lack of skilled independent directors had created structural governance problems. The shortfall in provisions had also widened, while the sector’s capital adequacy ratio had fallen to a record negative level. The sector was split between about 10 well-performing banks and the rest in severe crisis, he said.

Weak and Shariah-based banks are suffering acute liquidity shortages while idle liquidity across the sector had risen to about BDT 4.5 trillion, Khuda said.

He added that about BDT 5 trillion had been embezzled through fake loans and corruption, and a powerful political and business syndicate had siphoned BDT 2.5 trillion to BDT 3 trillion abroad.

Khuda said Bangladesh Bank was carrying out a major restructuring of the financial sector to protect depositors, and that the number of banks should be reduced. State-owned and specialised banks should be merged into a manageable system, he said.

The session was chaired by BIBM Director General Md Ejazul Islam, with a welcome address by Professor Shah Md Ahsan Habib. The conference’s final day today will feature seven plenary sessions and 56 research papers.